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RULE

DEFINING AND DELIMITING THE EXEMPTIONS FOR EXECUTIVE, ADMINISTRATIVE,
PROFESSIONAL, OUTSIDE SALES, AND COMPUTER EMPLOYEES

A Rule by the Wage and Hour Division on 04/26/2024

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DOCUMENT DETAILS

Information about this document as published in the Federal Register.

Printed version: PDF Publication Date: 04/26/2024 Agencies: Department of Labor
Wage and Hour Division Dates: The effective date for this final rule is July 1,
2024. Sections 541.600(a)(2) and 541.601(a)(2) are applicable beginning January
1, 2025. Effective Date: 07/01/2024 Document Type: Rule Document Citation: 89 FR
32842 Page: 32842-32973 (132 pages) CFR: 29 CFR 541 RIN: 1235-AA39 Document
Number: 2024-08038

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Register document.

Defining and Delimiting the Exemptions for Executive, Administrative,
Professional, Outside Sales, and Computer Employees

WHD-2023-0001
Supporting Documents:
1. Response to Requests to Extend the Comment Period
2. 100 Word summary
3. AppendixA_AppendixB_09-08-2023-
4. Exemptions from the Fair Labor Standards Act: Outside Salesworkers and...
5. Report and Recommendations on Proposed Revisions of Regulations, Part
541,...
6. Executive, Administrative, Professional, Outside Salesman Redefined
(October...
7. Report and Recommendations on Proposed Revision of Regulations, Part 541...

See all 7 supporting documents

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* ENHANCED CONTENT - TABLE OF CONTENTS

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* AGENCY:
* ACTION:
* SUMMARY:
* DATES:
* FOR FURTHER INFORMATION CONTACT:
* SUPPLEMENTARY INFORMATION:
* I. Executive Summary
* II. Background
* A. The FLSA
* B. Regulatory History
* 1. The Part 541 Regulations From 1938 to 2004
* 2. Part 541 Regulations From 2004 to 2019
* C. Overview of Existing Regulatory Requirements
* D. The Department's Proposal
* III. Need for Rulemaking
* IV. Effective Date
* V. Discussion of Final Regulatory Revisions
* A. Updating the Standard Salary Level and Total Annual Compensation
Threshold
* 1. The Department's Authority To Adopt a Salary Level Test
* 2. Initial Update to the Standard Salary Level and Total Annual
Compensation Threshold To Reflect the Change in Earnings Since the 2019
Rule
* 3. Future Triennial Updates To Keep the Standard Salary Level and Total
Annual Compensation Threshold Up to Date
* i. The Department's Authority To Update the Standard Salary Level and
Total Annual Compensation Threshold With Current Data in the Future
* ii. Rationale for Continuing To Update the Standard Salary Level and Total
Annual Compensation Threshold With Current Data in the Future
* iii. Specific Features of the Updating Mechanism
* B. Standard Salary Level
* 1. History of the Salary Level
* 2. Standard Salary Level Proposal
* 3. Salary Level Test Function and Effects
* 4. Discussion of Comments and Final Standard Salary Level
* i. Overall Commenter Feedback
* ii. Fully Restoring the Salary Level's Screening Function
* iii. Accounting for the Shift to a One-Test System
* iv. Selecting the Salary Level Methodology
* v. Salary Level Effects
* iv. Other Issues
* 5. Assessing the Impact of the Salary Level
* i. The Department's Assessment of the Impact of the Proposed Salary Level
* ii. Comments Received
* iii. Assessing the Impact of the New Salary Level
* Figure A—Distribution of Full-Time Salaried White-Collar Workers by Weekly
Earnings
* Figure B—Salaried White-Collar Workers Earning Above and Below the
Standard Salary Level Who Meet or Do Not Meet the Standard Duties Test
* Figure C—Salaried White-Collar Workers Between the Long and Short Test
Salary Levels Who Meet or Do Not Meet the Standard Duties Test
* C. Highly Compensated Employees
* D. Severability
* 1. The Department's Proposal
* 2. Discussion of Comments and Final Rule
* VI. Paperwork Reduction Act
* VII. Analysis Conducted in Accordance With Executive Order 12866,
Regulatory Planning and Review, and Executive Order 13563, Improving
Regulation and Regulatory Review
* A. Introduction
* 1. Background
* Table 1—Historical Weekly Salary Levels for the EAP Exemptions
* 2. Need for Rulemaking
* 3. Summary of Affected Workers, Costs, Benefits, and Transfers
* Table 2—Summary of Affected Workers, Regulatory Costs, and
Transfers—Standard and HCE Salary Levels
* B. Number of Affected EAP Workers
* 1. Overview
* 2. Data
* 3. Number of Workers Subject to the FLSA and the Department's Part 541
Regulations
* Figure 1—Flow Chart of FLSA Exemptions and Estimated Number of Affected
Workers
* 4. Number of Workers Who Are White-Collar, Salaried, Not Eligible for
Another (Non-EAP) Overtime Exemption
* 5. Number of Current EAP Exempt Workers
* i. Salary Basis
* ii. Salary Level
* iii. Duties
* Table 3—Probability Worker in Category Passes the Duties Tests
* 6. Potentially Affected Exempt EAP Workers
* Figure 2—Exemption Status and Number of Affected Workers
* 7. Number of Affected EAP Workers
* Figure 3—Pie Chart of Potentially Affected Employees and Their Affected
Status
* C. Effects of Revised Salary and Compensation Levels
* 1. Overview and Summary of Quantified Effects
* Table 4—Summary of Affected Workers and Regulatory Costs and Transfers
* 2. Characteristics of Affected EAP Workers
* Table 5—Number of Affected EAP Workers, Mean Overtime Hours, and Mean
Weekly Earnings, Year 1
* Table 6—Estimated Number of Workers and Whether They Will Be Affected by
the New Earnings Thresholds, by Industry and Occupation, Year 1
* Table 7—Estimated Number of Workers and Whether They Will Be Affected by
the New Earnings Thresholds, by Region, Division, and MSA Status, Year 1
* Table 8—Estimated Number of Workers and Whether They Will Be Affected by
the New Earnings Thresholds, by Demographics, Year 1
* 3. Costs
* i. Summary
* Table 9—Summary of Year 1 Direct Employer Costs (Millions)
* ii. Regulatory Familiarization Costs
* iii. Adjustment Costs
* iv. Managerial Costs
* v. Other Potential Costs
* (a) Reduced Scheduling Flexibility
* (b) Preference for Salaried Status
* (c) Reduction in Employer-Provided Benefits
* (d) Increased Prices
* (e) Reduced Services
* (f) Reduced Profits
* (g) Hiring Costs
* (h) Hours-Related Worker Effects
* (i) Wage Compression
* 4. Transfers
* i. Overview
* Table 10—Total Annual Change in Earnings for Affected EAP Workers by
Provision, Year 1 (Millions)
* ii. Transfers Due to the Minimum Wage Provision
* Table 11—Minimum Wage Only: Mean Hourly Wages, Usual Weekly Hours and
Weekly Earnings for Affected EAP Workers, Year 1
* iii. Transfers Due to the Overtime Pay Provision
* (a) Introduction
* (b) Literature on Employer Adjustments
* (c) Comments Regarding Transfers
* (d) Identifying Types of Affected Workers
* Table 12—Types of Affected Workers
* (e) Modeling Changes in Wages and Hours
* Figure 4—Flow Chart of the Rule's Effect on Earnings and Hours Worked
* (f) Estimated Number of and Effects on Affected EAP Workers
* Table 13—Affected EAP Workers by Type (1,000s), Year 1
* Table 14—Average Regular Rate of Pay by Type of Affected EAP Worker, Year
1
* Table 15—Average Weekly Hours by Type of Affected EAP Worker, Year 1
* Table 16—Average Weekly Earnings by Type of Affected EAP Worker, Year 1
* iv. Potential Transfers Not Quantified
* 5. Benefits and Cost Savings
* 6. Sensitivity Analysis of Transfer Payments
* Table 17—Summary of the Assumptions Used to Calculate the Lower Estimate,
Primary Estimate, and Upper Estimate of Transfers
* 7. Effects by Regions and Industries
* Table 18—Potentially Affected and Affected Workers, by Region, Year 1
* Table 19—Annual Transfers by Region, Year 1
* Table 20—Annual Costs by Region, Year 1
* Table 21—Annual Transfers and Costs as Percent of Payroll and of Revenue
by Region, Year 1
* Table 22—Potentially Affected and Affected Workers, by Industry, Year 1
* Table 23—Annual Transfers and Costs by Industry, Year 1
* Table 24—Annual Transfers, Total Costs, and Transfers and Costs as Percent
of Payroll, Revenue, and Profit by Industry, Year 1
* 8. Regulatory Alternatives
* Table 25—Updated Standard Salary and HCE Compensation Levels and
Alternatives, Affected EAP Workers, Costs, and Transfers, Year 1
* 9. Triennial Updates to the Standard Salary and Annual Compensation
Thresholds
* i. Initial Update
* ii. Future Updates
* Figure 5—Projected Future Salary and Compensation Levels, Nominal Dollars
* Figure 6—Projected Future Standard Salary Levels, Nominal and Real
(Constant 2023 Dollars)
* iii. Concerns With Use of Fixed Earnings Percentile as Updating
Methodology
* (a) Workers May Remain Salaried Even if Nonexempt
* (b) Previous Salary Level Updates Did Not Indicate a Significant Number of
Workers Being Converted to Hourly
* (c) The Department's Modeling of Possible “Ratcheting” Indicates Effect
Would Be Negligible
* 10. Projections
* Figure 7—10-Year Projected Number of Affected Workers
* Figure 8—10-Year Projected Costs and Transfers (Millions $2023)
* Table 26—Projected Costs and Transfers, Standard Salary and HCE
Compensation Levels
* Figure 9—10-Year Projected Number of Affected Workers, With and Without
Updating
* Table 27—Comparison of Projected Costs and Transfers With and Without
Updating
* VIII. Final Regulatory Flexibility Analysis (FRFA)
* A. Objectives of, and Need for, the Final Rule
* B. Response to Comment Filed by the Chief Counsel for Advocacy of the
Small Business Administration
* C. Significant Issues Raised by Public Comments in Response to the Initial
Regulatory Flexibility Analysis
* D. Estimate of the Number of Affected Small Entities
* 1. Definition of Small Entity
* 2. Number of Small Entities and Employees
* Table 28—Number of Entities and Employees by SBA Size Standards, by
Industry and Employer Type
* 3. Number of Affected Small Entities and Employees
* Table 29—Number of Affected Workers Employed by Small Entities, by
Industry and Employer Type
* Table 30—Number of Small Affected Entities and Employees by Industry and
Employer Type
* 4. Impacts to Affected Small Entities
* Table 31—Overview of Parameters Used for Costs to Small Businesses and the
Impacts on Small Businesses
* Table 32—Year 1 Small Establishment Direct Costs, Total and per
Establishment, by Industry and Employer Type
* Table 33—Year 1 Small Establishment Payroll Increases, Total and per
Establishment, by Industry and Employer Type
* Table 34—Year 1 Small Establishment Direct Costs and Payroll Increases,
Total and per Entity, by Industry and Employer Type, Using All Employees
in Entity Affected Method
* 5. Projected Effects to Affected Small Entities in Year 2 Through Year 10
* Table 35—Projected Number of Affected Workers in Small Entities, by
Industry
* Table 36—Projected Direct Costs and Payroll Increases for Affected Small
Entities, by Industry, Using All Employees in Entity Affected Method
* Figure 10—10-Year Projected Number of Affected Workers in Small Entities,
and Associated Costs and Payroll Increases
* E. Projected Reporting, Recordkeeping, and Other Compliance Requirements
of the Rule
* F. Steps the Agency Has Taken To Minimize the Significant Economic Impact
on Small Entities
* 1. Differing Compliance and Reporting Requirements for Small Entities
* 2. Least Burdensome Option or Explanation Required
* i. Differing Compliance or Reporting Requirements That Take Into Account
the Resources Available to Small Entities
* ii. The Clarification, Consolidation, or Simplification of Compliance and
Reporting Requirements for Small Entities
* iii. The Use of Performance Rather Than Design Standards
* iv. An Exemption From Coverage of the Rule, or any Part Thereof, for Such
Small Entities
* IX. Unfunded Mandates Reform Act Analysis
* A. Authorizing Legislation
* B. Costs and Benefits
* Table 37—Summary of Year 1 Impacts by Type of Employer
* C. Summary of State, Local, and Tribal Government Input
* D. Least Burdensome Option or Explanation Required
* X. Executive Order 13132, Federalism
* XI. Executive Order 13175, Indian Tribal Governments
* List of Subjects in 29 CFR Part 541
* PART 541—DEFINING AND DELIMITING THE EXEMPTIONS FOR EXECUTIVE,
ADMINISTRATIVE, PROFESSIONAL, COMPUTER AND OUTSIDE SALES EMPLOYEES
* Footnotes

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Start Preamble Start Printed Page 32842

AGENCY:

Wage and Hour Division, Department of Labor.

ACTION:

Final rule.

SUMMARY:

The Department of Labor (Department) is updating and revising the regulations
issued under the Fair Labor Standards Act implementing the exemptions from
minimum wage and overtime pay requirements for executive, administrative,
professional, outside sales, and computer employees. Significant revisions
include increasing the standard salary level, increasing the highly compensated
employee total annual compensation threshold, and adding to the regulations a
mechanism that will allow for the timely and efficient updating of the salary
and compensation thresholds, including an initial update on July 1, 2024, to
reflect earnings growth. The Department is not finalizing in this rule its
proposal to apply the standard salary level to the U.S. territories subject to
the Federal minimum wage and to update the special salary levels for American
Samoa and the motion picture industry.

DATES:

The effective date for this final rule is July 1, 2024. Sections 541.600(a)(2)
and 541.601(a)(2) are applicable beginning January 1, 2025.

Start Further Info

FOR FURTHER INFORMATION CONTACT:

Daniel Navarrete, Acting Director, Division of Regulations, Legislation, and
Interpretation, Wage and Hour Division, U.S. Department of Labor, Room S-3502,
200 Constitution Avenue NW, Washington, DC 20210; telephone: (202) 693-0406
(this is not a toll-free number). Alternative formats are available upon request
by calling 1-866-487-9243. If you are deaf, hard of hearing, or have a speech
disability, please dial 7-1-1 to access telecommunications relay services.

Questions of interpretation or enforcement of the agency's existing regulations
may be directed to the nearest Wage and Hour Division (WHD) district office.
Locate the nearest office by calling the WHD's toll-free help line at (866)
4US-WAGE ((866) 487-9243) between 8 a.m. and 5 p.m. in your local time zone, or
log onto WHD's website at https://www.dol.gov/ agencies/ whd/ contact/
local-offices for a nationwide listing of WHD district and area offices.

End Further Info End Preamble Start Supplemental Information

SUPPLEMENTARY INFORMATION:

I. EXECUTIVE SUMMARY

The Fair Labor Standards Act (FLSA or Act) requires covered employers to pay
employees a minimum wage and, for employees who work more than 40 hours in a
week, overtime premium pay of at least 1.5 times the employee's regular rate of
pay. Section 13(a)(1) of the FLSA, which was included in the original Act in
1938, exempts from the minimum wage and overtime pay requirements “any employee
employed in a bona fide executive, administrative, or professional
capacity[.]” [1] The exemption is commonly referred to as the “white-collar” or
executive, administrative, or professional (EAP) exemption. The statute
expressly gives the Secretary of Labor (Secretary) authority to define and
delimit the terms of the exemption. Since 1940, the regulations implementing the
EAP exemption have generally required that each of the following three tests
must be met: (1) the employee must be paid a predetermined and fixed salary that
is not subject to reduction because of variations in the quality or quantity of
work performed (the salary basis test); (2) the amount of salary paid must meet
a minimum specified amount (the salary level test); and (3) the employee's job
duties must primarily involve executive, administrative, or professional duties
as defined by the regulations (the duties test). The employer bears the burden
of establishing the applicability of the exemption.[2] Job titles and job
descriptions do not determine EAP exemption status, nor does merely paying an
employee a salary.

Consistent with its broad authority under the Act, in this final rule the
Department is setting compensation thresholds for the standard test and the
highly compensated employee test that will work effectively with the respective
duties tests to better identify who is employed in a bona fide EAP capacity for
purposes of determining exemption status under the Act. Specifically, the
Department is setting the standard salary level at the 35th percentile of weekly
earnings of full-time salaried workers in the lowest-wage Census Region ($1,128
per week or $58,656 annually for a full-year worker) [3] and the highly
compensated employee total annual compensation threshold at the annualized
weekly earnings of the 85th percentile of full-time salaried workers nationally
($151,164). These compensation thresholds are firmly grounded in the authority
that the FLSA grants to the Secretary to define and delimit the EAP exemption, a
power the Secretary has exercised for 85 years.

The increase in the standard salary level to the 35th percentile of weekly
earnings of full-time salaried workers in the lowest-wage Census Region better
fulfills the Department's obligation under the statute to define and delimit who
is employed in a bona fide EAP capacity. Upon reflection, the Department has
determined that its rulemakings over the past 20 years, since the Department
simplified the test for the EAP exemption in 2004 by replacing the historic
two-test system for determining exemption status with the single standard test,
have vacillated between two distinct approaches: One used in rules in 2004 [4]
and 2019,[5] that exempted lower-paid workers who historically had been entitled
to overtime because they did not meet the more detailed duties requirements of
the test that was in place from 1949 to 2004; and one used in a rule in 2016,[6]
that restored overtime protection to lower-paid white-collar workers who
performed significant amounts of nonexempt work but also removed from the
exemption other lower-paid workers who historically were exempt because they met
the prior more detailed duties test, an approach that received unfavorable
treatment in litigation.[7] Having grappled with these different approaches to
setting the standard salary level, this final rule retains the simplified
standard test, the benefits of Start Printed Page 32843 which were recognized in
the Department's 2004, 2016, and 2019 rulemakings,[8] while, through a revised
methodology, fully restoring the salary level's screening function and
accounting for the switch from a two-test to a one-test system for defining the
EAP exemption, and also separately updating the standard salary level to account
for earnings growth since the 2019 rule.

The new standard salary level will, in combination with the standard duties
test, better define and delimit which employees are employed in a bona fide EAP
capacity. By setting a salary level above what the methodology used in 2004 and
2019 would produce using current data, the new standard salary level will ensure
that, consistent with the Department's historical approach to the exemption,
fewer lower-paid white-collar employees who perform significant amounts of
nonexempt work are included in the exemption. At the same time, by setting the
salary level below what the methodology used in 2016 would produce using current
data, the new standard salary level will allow employers to continue to use the
exemption for many lower-paid white-collar employees who were made exempt under
the 2004 standard duties test. The combined result will be a more effective test
for determining who is employed in a bona fide EAP capacity. The applicability
date of the new standard salary level will be January 1, 2025. The Department is
not finalizing its proposal to apply the standard salary level to the U.S.
territories subject to the federal minimum wage and to update the special salary
levels for American Samoa and the motion picture industry.[9]

The Department is also increasing the earnings threshold for the highly
compensated employee (HCE) exemption, which was added to the regulations in 2004
and applies to certain highly compensated employees and combines a much higher
annual compensation requirement with a minimal duties test. The HCE test's
primary purpose is to serve as a streamlined alternative for very highly
compensated employees because a very high level of compensation is a strong
indicator of an employee's exempt status, thus eliminating the need for a
detailed duties analysis.[10] The Department is increasing the HCE total annual
compensation threshold to the annualized weekly earnings amount of the 85th
percentile of full-time salaried workers nationally ($151,164). The new HCE
threshold is high enough to reserve the test for those employees who are “at the
very top of [the] economic ladder” [11] and will guard against the unintended
exemption of workers who are not bona fide EAP employees, including those in
high-income regions and industries. The applicability date of the new HCE total
annual compensation threshold will be January 1, 2025.

In each of its part 541 rulemakings since 2004, the Department recognized the
need to regularly update the earnings thresholds to ensure that they remain
effective in helping differentiate between exempt and nonexempt employees. As
the Department observed in these rulemakings, even a well-calibrated salary
level that is not kept up to date becomes obsolete as wages for nonexempt
workers increase over time.[12] Long intervals between rulemakings have resulted
in eroded earnings thresholds based on outdated earnings data that were
ill-equipped to help identify bona fide EAP employees.

To address this problem, in the 2004 and 2019 rules the Department expressed its
commitment to regularly updating the salary levels.[13] In the 2016 rule, it
included a regulatory provision to automatically update the salary levels.[14]
Based on its long experience with updating the salary levels, the Department has
determined that adopting a regulatory provision for updating the salary levels
to reflect current earnings data, with an exception for pausing future updates
under certain conditions, is the most viable and efficient way to ensure the EAP
exemption earnings thresholds keep pace with changes in employee pay and thus
remain effective in helping determine exemption status. This rule establishes a
new updating mechanism. The initial update to the standard salary level and the
HCE total annual compensation threshold will take place on July 1, 2024, and
will use the methodologies in place at that time ( i.e., the 2019 rule
methodologies), resulting in a $844 per week standard salary level and a
$132,964 HCE total annual compensation threshold. Future updates to the standard
salary level and HCE total annual compensation threshold with current earnings
data will begin 3 years after the date of the initial update (July 1, 2027), and
every 3 years thereafter, using the methodologies in place at the time of the
updates. The Department anticipates that, by the time the first triennial update
under the updating mechanism occurs, assuming the Department has not engaged in
further rulemaking, the new methodologies for the standard salary level and HCE
total annual compensation requirement established by this final rule will have
become effective and the triennial update will employ these new methodologies.
The new updating mechanism will allow for the timely, predictable, and efficient
updating of the earnings thresholds.

The Department estimates that in Year 1, approximately 1 million employees who
earn at least $684 per week but less than $844 per week will be impacted by the
initial update applying current wage data to the standard salary level
methodology from the 2019 rule, and approximately 3 million employees who earn
at least $844 per week but less than the new standard salary level of $1,128 per
week will be impacted by the subsequent application of the new standard salary
level. See Table 25. As explained in section V.B.4.ii, for 1.8 million of the
affected employees (including the 1 million impacted by the initial update),
this rule will restore overtime protections that they would have been entitled
to under every rule prior to the 2019 rule. The Department also estimates that
292,900 employees who are currently exempt under the HCE test, but do not meet
the standard test for exemption, will be affected by the proposed increase in
the HCE total annual compensation level. Absent an employer increasing these
employees' pay to at or above the new HCE level, the exemption status of these
employees will turn on the standard duties test (which these employees do not
meet) rather than the minimal duties test that applies to employees earning at
or above the HCE threshold. The economic analysis quantifies the direct costs
resulting from this rule: (1) regulatory familiarization costs; (2) adjustment
costs; and (3) managerial costs. The Department estimates that total annualized
direct employer costs over the first 10 years will be $803 million with a 7
percent discount rate. This rule will also give employees higher earnings in the
form of transfers of income from employers to employees. The Start Printed Page
32844 Department estimates annualized transfers will be $1.5 billion, with a 7
percent discount rate.

II. BACKGROUND

A. THE FLSA

The FLSA generally requires covered employers to pay employees at least the
federal minimum wage (currently $7.25 an hour) for all hours worked and overtime
premium pay of at least one and one-half times the employee's regular rate of
pay for all hours worked over 40 in a workweek.[15] However, section 13(a)(1) of
the FLSA, codified at 29 U.S.C. 213(a)(1), provides an exemption from both
minimum wage and overtime pay for “any employee employed in a bona fide
executive, administrative, or professional capacity . . . or in the capacity of
[an] outside salesman (as such terms are defined and delimited from time to time
by regulations of the Secretary [of Labor], subject to the provisions of [the
Administrative Procedure Act] . . .).” The FLSA does not define the terms
“executive,” “administrative,” “professional,” or “outside salesman,” but rather
directs the Secretary to define those terms through rulemaking. Pursuant to
Congress's grant of rulemaking authority, since 1938 the Department has issued
regulations at 29 CFR part 541 to define and delimit the scope of the section
13(a)(1) exemption.[16] Because Congress explicitly gave the Secretary authority
to define and delimit the specific terms of the exemption, the regulations so
issued have the binding effect of law.[17]

The exemption for executive, administrative, or professional employees was
included in the original FLSA legislation passed in 1938.[18] It was modeled
after similar provisions contained in the earlier National Industrial Recovery
Act of 1933 and state law precedents.[19] As the Department has explained in
prior rules, the EAP exemption is premised on two policy considerations. First,
the type of work exempt employees perform is difficult to standardize to any
time frame and cannot be easily spread to other workers after 40 hours in a
week, making enforcement of the overtime provisions difficult and generally
precluding the potential job expansion intended by the FLSA's time-and-a-half
overtime premium.[20] Second, exempt workers typically earn salaries well above
the minimum wage and are presumed to enjoy other privileges to compensate them
for their long hours of work. These include, for example, above-average fringe
benefits and better opportunities for advancement, setting them apart from
nonexempt workers entitled to overtime pay.[21]

Section 13(a)(1) exempts covered EAP employees from both the FLSA's minimum wage
and overtime requirements. However, because of their long hours of work, its
most significant impact is its exemption of these employees from the Act's
overtime protections, as discussed in section VII.C.4. An employer may employ
such exempt employees for any number of hours in the workweek without paying an
overtime premium. Some state laws have stricter standards to be exempt from
state minimum wage and overtime protections than those which exist under federal
law, such as higher salary levels or more stringent duties tests. The FLSA does
not preempt any such stricter state standards.[22] If a state establishes a
higher standard than the provisions of the FLSA, the higher standard applies in
that state.

B. REGULATORY HISTORY

The Department's part 541 regulations have consistently looked to the duties
performed by the employee and the salary paid by the employer in determining
whether an individual is employed in a bona fide executive, administrative, or
professional capacity. Since 1940, the Department's implementing regulations
have generally required each of the following three prongs to be satisfied for
the exemption to apply: (1) the employee must be paid a predetermined and fixed
salary that is not subject to reduction because of variations in the quality or
quantity of work performed (the salary basis test); (2) the amount of salary
paid must meet a minimum specified amount (the salary level test); and (3) the
employee's job duties must primarily involve executive, administrative, or
professional duties as defined by the regulations (the duties test).

1. THE PART 541 REGULATIONS FROM 1938 TO 2004

The Department's part 541 regulations have always included earnings criteria.
From the first Part 541 regulations, there has been “wide agreement” that the
amount paid to an employee is “a valuable and easily applied index to the `bona
fide' character of the employment for which [the] exemption is claimed[.]” [23]
Because EAP employees “are denied the protection of the [A]ct[,]” they are
“assumed [to] enjoy compensatory privileges” which distinguish them from
nonexempt employees, including substantially higher pay.[24] Additionally, the
Department has long recognized that the salary level test is a useful criterion
for helping identify bona fide EAP employees and provides a practical guide for
employers and employees, thus tending to reduce litigation and ensure that
nonexempt employees receive the overtime protection to which they are
entitled.[25] These benefits accrue to employees and employers alike, which is
why, despite disagreement over the appropriate magnitude of the part 541
earnings thresholds, an “overwhelming majority” of stakeholders have supported
the retention of such thresholds in prior part 541 rulemakings.[26]

The Department issued the first version of the part 541 regulations in October
1938.[27] The Department's initial regulations included a $30 per week
compensation requirement for executive and administrative employees. It also
included a duties test that prohibited employers from claiming the EAP exemption
for employees who performed “[a] substantial amount of work of the same nature
as that performed by nonexempt employees of the employer.” [28]

Start Printed Page 32845

The Department issued the first update to its part 541 regulations in October
1940,[29] following extensive public hearings.[30] Among other changes, the 1940
update newly applied the salary level requirement to professional employees;
added the salary basis requirement to the tests for executive, administrative,
and professional employees; and introduced a 20 percent cap on the amount of
nonexempt work that executive and professional employees could perform each
workweek, replacing language which prohibited the performance of a “substantial
amount” of nonexempt work.[31]

The Department conducted further hearings on the part 541 regulations in
1947 [32] and issued revised regulations in December 1949.[33] The 1949
rulemaking updated the salary levels set in 1940 and introduced a second, less
stringent duties test for higher paid executive, administrative, and
professional employees.[34] Thus, beginning in 1949, the part 541 regulations
contained two tests for the EAP exemption. These tests became known as the
“long” test and the “short” test. The long test paired a lower earnings
threshold with a more rigorous duties test that generally limited the
performance of nonexempt work to no more than 20 percent of an employee's hours
worked in a workweek. The short test paired a higher salary level and a less
rigorous duties test, with no specified limit on the performance of nonexempt
work. From 1958 until 2004, the regulations in place generally set the long test
salary level at a level designed to exclude from exemption approximately the
lowest-paid 10 percent of salaried white-collar employees who performed EAP
duties in lower-wage areas and industries and set the short test salary level
significantly higher.[35] The salary and duties components of each test
complemented each other, and the two tests worked in combination to determine
whether an individual was employed in a bona fide EAP capacity. Lower-paid
employees who met the long test salary level but did not meet the higher short
test salary level were subject to the long duties test which ensured that these
employees were employed in an EAP capacity by limiting the amount of time they
could spend on nonexempt work. Employees who met the higher short test salary
level were considered to be more likely to meet the requirements of the long
duties test and thus were subject to a short-cut duties test for determining
exemption status.

Additional changes to the regulations, including salary level updates, were made
in 1954,[36] 1958,[37] 1961,[38] 1963,[39] 1967,[40] 1970,[41] 1973,[42] and
1975.[43] The Department revised the part 541 regulations twice in 1992 but did
not update the salary thresholds at that time.[44] None of these updates changed
the basic structure of the long and short tests.

The Department described the salary levels adopted in the 1975 rule as “interim
rates,” intended to “be in effect for an interim period pending the completion
of a study [of worker earnings] by the Bureau of Labor Statistics . . . in
1975.” [45] However, those salary levels remained in effect until 2004. The
utility of the salary levels in helping to define the EAP exemption decreased as
wages rose during this period. In 1991, the federal minimum wage rose to $4.25
per hour,[46] which for a 40-hour workweek exceeded the lower long test salary
level of $155 per week for executive and administrative employees and equaled
the long test salary level of $170 per week for professional employees. In 1997,
the federal minimum wage rose to $5.15 per hour,[47] which for a 40-hour
workweek not only exceeded the long test salary levels, but also was close to
the higher short test salary level of $250 per week.

2. PART 541 REGULATIONS FROM 2004 TO 2019

The Department published a final rule in April 2004 (the 2004 rule) [48] that
updated the part 541 salary levels for the first time since 1975 and made
several significant changes to the regulations. Most significantly, the
Department eliminated the separate long and short tests and replaced them with a
single standard test. The Department set the standard salary level at $455 per
week, which was equivalent to the 20th percentile of weekly earnings of
full-time salaried workers in the lowest-wage Census Region (the South) and in
the retail industry nationally. The Department paired the new standard salary
level test with a new standard duties test for executive, administrative, and
professional employees, respectively, which was substantially equivalent to the
short duties test used in the two-test system.[49]

In the 2004 rule, the Department acknowledged that the switch to the single
standard test for exemption was a significant change in the regulatory
structure,[50] and noted that the shift to setting the salary level based on
“the lowest 20 percent of salaried employees in the South, rather than the
lowest 10 percent” of EAP employees was made, in part, “because of the proposed
change from the `short' and `long' test structure[.]” [51] The Department
asserted that elimination of the long duties test was warranted because “the
relatively small number of employees currently earning from $155 to $250 per
week, and thus tested for exemption under the `long' duties test, will gain
stronger protections under the increased minimum salary level which . . .
guarantees overtime protection for all employees earning less than $455 per
week[.]” [52] The Department acknowledged, however, that the new standard salary
level was comparable to the lower long test salary level used in the two-test
system ( i.e., if the Department's long test salary level methodology had been
applied to contemporaneous data).[53] Thus, Start Printed Page 32846 employees
who would have been subject to the long duties test with its limit on the amount
of time spent on nonexempt work if the two-test system had been updated were
subject to the equivalent of the short duties test under the new standard test.
For example, under the 2004 rule's standard test, an employee who earned just
over the rule's standard salary threshold of $455 in weekly salary, and who met
the standard duties test, was exempt even if they would not have met the
previous long duties test because they spent more than 20 percent of their time
performing nonexempt work. If the Department had instead retained the two-test
system and updated the long test salary level to $455, that same employee would
have been nonexempt because they would have been subject to the long test's more
rigorous duties analysis due to their lower salary.

In the 2004 rule, the Department also created a new test for exemption for
certain highly compensated employees.[54] The HCE test paired a minimal duties
requirement—customarily and regularly performing at least one of the exempt
duties or responsibilities of an EAP employee—with a high total annual
compensation requirement of $100,000, a threshold that exceeded the annual
earnings of approximately 93.7 percent of salaried workers nationwide.[55] The
Department also ended the use of special salary levels for Puerto Rico and the
U.S. Virgin Islands, as they had become subject to the federal minimum wage
since the Department last updated the part 541 salary levels in 1975, and set a
special salary level only for American Samoa, which remained not subject to the
federal minimum wage.[56] The Department also expressed its intent “in the
future to update the salary levels on a more regular basis, as it did prior to
1975.” [57]

In May 2016, the Department issued a final rule (the 2016 rule) that retained
the single-test system introduced in 2004 but increased the standard salary
level and provided for regular updating. Specifically, the 2016 rule (1)
increased the standard salary level from the 2004 salary level of $455 to $913
per week, the 40th percentile of weekly earnings of full-time salaried workers
in the lowest-wage Census Region (the South); [58] (2) increased the HCE test
total annual compensation amount from $100,000 to $134,004 per year; [59] (3)
increased the special salary level for EAP workers in American Samoa; [60] (4)
allowed employers, for the first time, to credit nondiscretionary bonuses,
incentive payments, and commissions paid at least quarterly towards up to 10
percent of the standard salary level; [61] and (5) added a mechanism to
automatically update the part 541 earnings thresholds every 3 years.[62] The
Department did not change any of the standard duties test criteria in the 2016
rule,[63] opting instead to adopt a standard salary level set at the low end of
the historical range of short test salary levels used in the pre-2004 two-test
system.[64] The 2016 rule was scheduled to take effect on December 1, 2016.

On November 22, 2016, the U.S. District Court for the Eastern District of Texas
issued an order preliminarily enjoining the Department from implementing and
enforcing the 2016 rule.[65] On August 31, 2017, the district court granted
summary judgment to the plaintiff challengers, holding that the 2016 rule's
salary level exceeded the Department's authority and invalidating the rule.[66]
On October 30, 2017, the Department of Justice appealed to the U.S. Court of
Appeals for the Fifth Circuit, which subsequently granted the Department's
motion to hold that appeal in abeyance while the Department undertook further
rulemaking. Following an NPRM published on March 22, 2019,[67] the Department
published a final rule on September 27, 2019 (the 2019 rule),[68] which formally
rescinded and replaced the 2016 rule.

The 2019 rule (1) raised the standard salary level from the 2004 salary level of
$455 to $684 per week, the equivalent of the 20th percentile of weekly earnings
of full-time salaried workers in the lowest-wage Census Region (the South)
and/or in the retail industry nationally; (2) increased the HCE total annual
compensation threshold from $100,000 to $107,432, the equivalent of the 80th
percentile of annual earnings of full-time salaried workers nationwide; (3)
allowed employers to credit nondiscretionary bonuses and incentive payments
(including commissions) paid at least annually to satisfy up to 10 percent of
the standard salary level; and (4) established special salary levels for all
U.S. territories.[69] The 2019 rule did not make changes to the standard duties
test.[70] While using the same methodology used in the 2004 rule to set the
salary threshold, the Department did not assert that this methodology
constituted the outer limit for defining and delimiting the salary threshold.
Rather, the Department reasoned the 2004 methodology was well-established,
reasonable, would minimize uncertainty and potential legal challenge, and would
address the concerns of the district court that the 2016 rule over-emphasized
the salary level.[71] The Department acknowledged that the new standard salary
level was, unlike the salary level set in the 2004 rule, below the long test
salary level used in the pre-2004 two-test system.[72] As in its 2004 rule, the
Department “reaffirm[ed] its intent to update the standard salary level and HCE
total annual compensation threshold more regularly in the future using
notice-and-comment rulemaking.” [73] The 2019 rule took effect on January 1,
2020.[74]

C. OVERVIEW OF EXISTING REGULATORY REQUIREMENTS

The part 541 regulations contain specific criteria that define each category of
exemption provided for in section 13(a)(1) for bona fide executive,
administrative, professional, and outside sales employees, as well as teachers
and academic administrative personnel. The regulations also define exempt
computer employees under sections 13(a)(1) and 13(a)(17). The employer bears the
burden of establishing the applicability of any exemption.[75] Job titles and
job descriptions do not determine Start Printed Page 32847 exemption status, nor
does merely paying an employee a salary rather than an hourly rate.

As previously indicated, to satisfy the EAP exemption, employees must meet
certain tests regarding their job duties [76] and generally must be paid on a
salary basis at least the amount specified in the regulations.[77] Some
employees, such as doctors, lawyers, teachers, and outside sales employees, are
not subject to salary tests.[78] Others, such as academic administrative
personnel and computer employees, are subject to special, contingent earning
thresholds.[79] The standard salary level for the EAP exemption is currently
$684 per week (equivalent to $35,568 per year), and the total annual
compensation level for highly compensated employees under the HCE test is
currently $107,432.[80] A special salary level of $455 per week currently
applies to employees in Puerto Rico, Guam, the U.S. Virgin Islands, and the
CNMI; [81] a special salary level of $380 per week applies to employees in
American Samoa; [82] and employers can pay a special weekly “base rate” of
$1,043 per week to employees in the motion picture producing industry.[83]
Nondiscretionary bonuses and incentive payments (including commissions) paid on
an annual or more frequent basis may be used to satisfy up to 10 percent of the
standard or special salary levels.[84]

Under the HCE test, employees who currently receive at least $107,432 in total
annual compensation are exempt from the FLSA's overtime requirements if they
customarily and regularly perform at least one of the exempt duties or
responsibilities of an executive, administrative, or professional employee
identified in the standard tests for exemption.[85] The HCE test applies only to
employees whose primary duty includes performing office or non-manual work.[86]
Employees considered exempt under the HCE test must currently receive at least
the $684 per week standard salary portion of their pay on a salary or fee basis
without regard to the payment of nondiscretionary bonuses and incentive
payments.[87]

D. THE DEPARTMENT'S PROPOSAL

On September 8, 2023, consistent with its statutory authority to define and
delimit the EAP exemption, the Department published a Notice of Proposed
Rulemaking (NPRM) to revise the part 541 regulations.[88] The Department
proposed to increase the standard salary level to the 35th percentile of weekly
earnings of full-time salaried workers in the lowest-wage Census Region
(currently the South), equivalent to $1,059 per week based on earnings data used
in the NPRM.[89] The Department also proposed to apply this updated standard
salary level to the four U.S. territories that are subject to the federal
minimum wage—Puerto Rico, Guam, the U.S. Virgin Islands, and the CNMI—and to
update the special salary levels for American Samoa and the motion picture
industry in relation to the new standard salary level.[90] The Department
additionally proposed raising the HCE test's total annual compensation
requirement to the annual equivalent of the 85th percentile of weekly earnings
of full-time salaried workers nationally, equivalent to $143,988 per year based
on earnings data used in the NPRM. Finally, the Department proposed a new
mechanism to update the standard salary level and the HCE total annual
compensation threshold every 3 years to ensure that they remain effective tests
for exemption.

The public comment period for the NPRM concluded on November 7, 2023. The
Department received approximately 33,300 comments in response to the NPRM during
the 60-day comment period.[91] Comments came from a diverse array of
stakeholders, including employees, employers, trade associations, small business
owners, labor unions, advocacy groups, nonprofit organizations, law firms,
academics, educational organizations and representatives, religious
organizations, economists, members of Congress, state and local government
officials, tribal representatives, and other interested members of the public.
All timely received comments may be viewed on the https://www.regulations.gov
website, docket ID WHD-2023-0001.

Commenter views on the merits of the NPRM varied widely. Some of the comments
the Department received were general statements of support or opposition, while
many others addressed the Department's proposal in considerable detail. As with
previous part 541 rulemakings, a majority of the total comments came from
comment campaigns using similar or identical template language. Such campaign
comments expressed support or opposition to the proposed salary level, and
sometimes addressed other issues including applying the salary level to
teachers,[92] and concerns from nonprofit agencies. However, the Department also
received thousands of unique comments. Significant issues raised in the comments
are discussed in this final rule. Comments germane to the need for this
rulemaking are discussed in section III, comments about the NPRM's proposals are
discussed in section V, and comments about the potential costs, benefits, and
other impacts of this rulemaking are discussed in section VII. The Department
has carefully considered the timely submitted comments about the Department's
proposal.

The Department received a number of comments on topics that are beyond the scope
of this rulemaking. A significant number of commenters (including a large
comment campaign) urged the Department to newly apply the part 541 salary
criteria to teachers. The Department did not solicit comment about the exemption
criteria for teachers in the NPRM and, as many commenters on this issue
recognized, addressing this issue would require a separate rulemaking. Other
topics outside the Start Printed Page 32848 scope of this rulemaking include,
for example, a request that the Department extend the right to overtime pay to
medical residents, create exemptions from the salary level test, allow employers
to credit the value of board and lodging towards the salary level, clarify
issues related to the fluctuating workweek method of calculating overtime pay,
or create a “safe harbor” provision for restaurant franchisors. The Department
is not addressing these issues in its final rule.

Several stakeholders such as Catholic Charities USA and the National Council of
Nonprofits expressed concern about funding and reimbursement rates to meet
potential new overtime expenses. The Department appreciates the concerns
conveyed in these comments and the challenges of adjusting public funding. As
discussed in section V.B.4.iv, however, the Department's EAP regulations have
never had special rules for nonprofit or charitable organizations and employees
of these organizations are subject to the EAP exemption if they satisfy the same
salary level, salary basis, and duties tests as other employees.

III. NEED FOR RULEMAKING

The goal of this rulemaking is to set effective earnings thresholds to help
define and delimit the FLSA's EAP exemption. To achieve this goal, the
Department is not only updating the single standard salary level to account for
earnings growth since the 2019 rule, but also to build on the lessons learned in
its most recent rulemakings to more effectively define and delimit employees
employed in a bona fide EAP capacity. To this end, the Department is finalizing
its proposed changes to the standard salary level and the HCE test's total
annual compensation requirement methodologies. Additionally, to maintain the
effectiveness of these tests, the Department is finalizing an updating mechanism
that will update these earnings thresholds to reflect current wage data,
initially on July 1, 2024 and every 3 years thereafter. The Department's
response to commenter feedback on the specific proposals included in the NPRM is
provided in section V. This section explains the need for the Department to
update the part 541 earnings thresholds and addresses commenter feedback on
whether the earnings thresholds established in the 2019 rule should be
increased.

As the Department explained in the NPRM, there is a need for the Department to
update the salary level to fully restore the salary level's screening function
and to account for the shift to a one-test system in the 2004 rule, which
broadened the exemption by placing the entire burden of this shift on employees
who historically were entitled to the FLSA's overtime protection because they
performed substantial amounts of nonexempt work and earned between the long and
short test salary levels, but became exempt because they passed the more lenient
standard duties test. Since switching from a two-test to a one-test system for
defining and delimiting the EAP exemption in 2004, the Department has followed
different approaches to set the standard salary level. In 2004, the Department
used a methodology that produced a salary level amount that was equivalent to
the lower long test salary level under the two-test system.[93] This approach
continued to perform the historical screening function of the long salary
test—providing overtime protection to employees who earned less than the long
test salary level. But it broadened the exemption to include employees earning
between the long and short test salary levels who historically had not met the
long duties test (and therefore were not considered bona fide EAP employees) and
now became exempt if they met the less rigorous standard duties test.[94] The
Department followed this same methodology to set the standard salary level in
2019, but applying the 2004 rule's methodology to contemporaneous data in 2019
resulted in a salary level that was lower than what would have been the
equivalent of the long test salary level and thus did not fulfill the historical
screening function for low-paid employees.[95] This broadened the EAP exemption
even further by, for the first time, exempting a group of white-collar employees
earning below the equivalent of the long test salary level.

To address the concern that the 2004 rule did not provide overtime compensation
for lower-salaried white-collar employees performing large amounts of nonexempt
work, in 2016 the Department set the standard salary level using a methodology
that produced a salary at the low end of the historical range of short test
salary levels.[96] This approach restored overtime protection to lower-salaried
white-collar employees who performed substantial amounts of nonexempt work, but
it also made nonexempt some employees paid below the new salary level who
performed only a limited amount of nonexempt work and would have been exempt
under the long duties test.[97] In the challenge to the 2016 rule, the district
court expressed concern that the 2016 rule conferred overtime eligibility based
on salary level alone to a substantial number of employees who would otherwise
be exempt.[98]

As explained in greater detail in section V.B, setting the standard salary level
at the 35th percentile of weekly earnings of full-time salaried workers in the
lowest-wage Census Region ($1,128 per week, $58,656 annually), which is below
the midpoint between the long and short tests, will work effectively with the
standard duties test to better define and delimit the EAP exemption, in part by
more effectively accounting for the switch from a two-test to a one-test system,
and will reasonably distribute the impact of the shift by ensuring overtime
protection for some lower-salaried employees without excluding from exemption
too many white-collar employees solely based on their salary level.[99] The new
standard salary level will also account for earnings growth since the 2019 rule
and fully restore the historical screening function of the salary level test. At
the same time, the duties test will continue to determine exemption status for a
large majority of all salaried white-collar employees subject to the part 541
regulations.

As the Department has explained,[100] earnings thresholds in the part 541
regulations gradually lose their effectiveness as the salaries paid to nonexempt
employees rise over time. These impacts grow in the absence of increases to the
salary threshold that keep pace with wage growth. Moreover, the longer it takes
for the Department to implement such increases, the larger the increases must be
to restore earning thresholds to maintain their effectiveness. More than 4 years
have passed since the 2019 final rule established the current earnings
thresholds. In the intervening years, salaried workers in the U.S. economy have
experienced a rapid growth in their nominal wages, such that the current $684
per week salary level now corresponds to approximately the 12th percentile of
earnings of full-time salaried workers in the lowest-wage Census Region and
retail nationally. The longer the Department waits to update these earnings
thresholds, the less effective they become in helping define Start Printed Page
32849 and delimit the EAP exemption. For example, applying the 2019 standard
salary level methodology to current earnings data will result in a new threshold
of $844 per week—a 23 percent ($160 per week) increase over the current $684
salary level. Earnings for full-time wage and salary workers nationally have
increased even more rapidly, rising by 24 percent during this period.[101]

The Department is also increasing the HCE total annual compensation threshold to
the annualized weekly earnings amount of the 85th percentile of full-time
salaried workers nationally ($151,164). Similar to the standard salary level,
nominal wage growth among higher-wage workers has eroded the effectiveness of
the HCE threshold; data shows that the $107,432 threshold now corresponds to the
70th percentile of annual earnings of full-time salaried workers nationwide.
Reapplying the 2019 methodology (annualized weekly earnings of the 80th
percentile of full-time salaried workers nationally) to current earnings data
would result in a threshold of $132,964 per year—a 24 percent increase over the
current threshold of $107,432. Increasing the HCE test's total annual
compensation threshold equivalent to the 85th percentile of salaried worker
earnings nationwide will result in an HCE threshold reserved for employees at
the top of today's economic ladder and, unlike a lower threshold, not risk the
unintended exemption of large numbers of employees in high-wage regions.

Finally, the Department is adopting a mechanism to regularly update the
thresholds for earnings growth, which will ensure that the thresholds continue
to work effectively to help identify EAP employees. As noted above, the history
of the part 541 regulations shows multiple, significant gaps during which the
salary levels were not updated and their effectiveness in helping to define the
EAP exemption decreased as wages increased. While the Department has generally
increased its part 541 earnings thresholds every 5 to 9 years in the 37 years
between 1938 and 1975, more recent decades have included long periods without
raising the salary level, resulting in significant erosion of the real value of
the threshold levels followed by unpredictable increases. Routine updates of the
earnings thresholds to reflect wage growth will bring certainty and stability to
employers and employees alike.

The Department received many comments addressing the adequacy of the current
salary and compensation thresholds set in the 2019 rule and the need for this
rulemaking. Generally, employees and affiliated commenters, including labor
unions, worker advocacy groups, plaintiff-side law firms, and others, supported
the rulemaking as an overdue effort to restore FLSA protections that have eroded
in recent decades, though a number of commenters urged the Department to adopt
higher threshold increases than those proposed in the NPRM. By contrast, most
employers and affiliated stakeholders opposed the main aspects of the proposal,
with many urging the Department to withdraw the NPRM altogether. Some employers
supported the proposal, or stated that they would support, or not oppose, some
change to the current thresholds.

Many commenters agreed with the Department's assessment that the current salary
level is too low. 102 See, e.g., Coalition of Gender Justice and Civil Rights
Organizations; Coalition of State Attorneys General; Economic Policy Institute
(EPI); Schuck Law LLC; Texas RioGrande Legal Aid; United Steel, Paper and
Forestry, Rubber, Manufacturing, Energy, Allied Industrial and Service Workers
International Union (United Steelworkers). Several commenters asserted that the
current standard salary level “fails to provide a true incentive for employers
to balance the additional hours they ask of their workers with the costs of . .
. overtime pay[,]” which they stated in turn undermines the FLSA's policy goals
of providing “extra pay for extra work . . . [and] spreading employment.” See,
e.g., Center for Law and Social Policy (CLASP); Caring Across Generations;
Family Values @Work; Jobs to Move America; North Carolina Justice Center;
Workplace Justice Project. Opining that the standard salary level “has been
increased too infrequently—and by too little[,]” Business for a Fair Minimum
Wage asserted that the “current outdated overtime threshold is ripe for abuse
and fosters unfair pay, worker burnout, poorer health and safety, and increased
employee turnover.” American Federation of Labor and Congress of Industrial
Organizations (AFL-CIO) asserted that the $684 per week salary level is “so low
that it risks becoming irrelevant[.]”

Finally, some supportive commenters provided reasons why, in their opinion, this
rulemaking is timely. A joint comment submitted by 10 Democratic members of the
House of Representatives asserted that “[o]vertime standards are long overdue
for a meaningful update.” See also AFL-CIO (asserting that setting the salary
level below the long test level in the 2019 rule “led to the faster irrelevance
of the current level”). The Coalition of State AGs commented that “[r]egardless
of whether [the $684 per week standard salary] level was appropriate in 2019,
economic trends in the intervening years have rendered that level obsolete . . .
[as] $684 in January 2020 has the same buying power as $816.90 in September
2023.” Sanford Heisler Sharp LLP (Sanford Heisler Sharp) invoked “the explosion
of remote work since 2020” as support for the rulemaking, asserting that the
significant increase in telework since 2020 has meant that employers are “no
longer constrained by the practical limitation of the worker leaving the
workplace.”

Many employer trade associations that were neutral or opposed to the NPRM's
specific proposals for increasing the compensation levels expressed openness or
support for a rulemaking to change the existing part 541 earnings thresholds.
See, e.g., Alliance for Chemical Distribution; Growmark Comment Campaign
(GROWMARK); National Cotton Ginners Association; National Golf Course Owners
Association. Reporting on the results of a survey taken of its members, Society
for Human Resource Management (SHRM) stated that its members “support a
reasonable increase to the rule's minimum salary threshold . . . as only 4% of
the total number of respondents indicated that they would not support any
increase.” Independent Sector remarked that “a healthy and equitable nonprofit
workforce requires an increase in the salary threshold beyond $35,568.” See also
North Carolina Center for Nonprofits (“The Center recognizes that a higher
salary level threshold would benefit people served by nonprofits and many
nonprofit employees, and we encourage the Department to move forward with a
final rule that increases the [current] salary level threshold[.]”). National
Association of Convenience Stores commented that it “acknowledges that the
minimum salary level should be revisited occasionally, and it support[s] USDOL's
approach in 2019 of doing so approximately every four years[.]” See also Retail
Industry Leaders Association Start Printed Page 32850 (RILA) (“We recognize that
the DOL committed itself in 2019 to engage in more regular reviews of the salary
threshold level for the [EAP] exemptions and that the DOL now is following up on
that commitment.”).

Other employer stakeholders disputed the need for this rulemaking. Many of these
commenters, including the American Bus Association, Americans for Prosperity
Foundation, Construction Industry Round Table, and National Restaurant
Association, asserted that increases to the part 541 earnings thresholds were
unnecessary at this time because the last update took effect on January 1, 2020.
A number of commenters stated that prior salary level updates have occurred less
frequently. See, e.g., National Association of Manufacturers (NAM) (never less
than 5 years); National Demolition Association (on average every 9 to 10 years);
National Association of Wholesale Distributors (NAW) (historically 7 to 9
years). National Retail Federation (NRF) commented that “[t]here has been no
increase of the federal minimum wage since 2019, and therefore, there is no need
to adjust the minimum salary threshold.” NRF further asserted that there was no
need to increase the part 541 earnings thresholds because “market forces have
already increased the compensation of lower-level exempt employees” since 2019,
echoing the sentiment from several individual employers that markets should
determine employee wages rather than government regulation. See also, e.g., Casa
Del Mar Beachfront Suites (opposing changes to the regulations and stating that
the wages it pays “are based on free enterprise and competitive business
plans”); Individual Small Business Commenter (asking the Department to “let the
market take care of the situation”). Numerous commenters also asserted that the
Department should refrain from amending the part 541 regulations at this time
due to current conditions in specific industries or the broader economy. See,
e.g., Asian American Hotel Owners Association, Inc.; American Hotel and Lodging
Association (AHLA); College and University Professional Association for Human
Resources (CUPA-HR); Food Marketing Institute (FMI); Indiana Chamber of
Commerce; National Association of Home Builders (NAHB).

Finally, a small number of commenters opposed this rulemaking on the grounds
that the Department lacks the legal authority to use any salary criteria to
define and delimit the EAP exemption. See, e.g., America First Policy Institute
(AFPI); National Federation of Independent Business (NFIB); Pacific Legal
Foundation.[103] However, the overwhelming majority of commenters did not oppose
the use of salary criteria in the part 541 regulations or address the
Department's authority, and a number of employer representatives expressed
general support for the use of earnings thresholds. See, e.g., AHLA (“[M]oving
to a duties-only test would undoubtedly result in a more rigid duties test . . .
[and] likely result in excessive burdens on the hospitality industry, including
new and onerous recordkeeping requirements and increased litigation costs.”);
National Restaurant Association (“[S]alary levels save investigators and
employers time by giving them a quick, short-hand test[.]”); Transportation
Intermediaries Association (“Implementing a duties-only test without considering
salary would be overly complex[.]”). This sentiment is consistent with
stakeholder feedback provided in earlier part 541 rulemakings.[104]

Having reviewed the comments received, the Department remains of the view that
the earnings criteria in the part 541 regulations must be increased and
disagrees with commenters that urged the Department to withdraw its proposal. In
addition to updating the salary level to account for wage growth since 2019, an
update is needed in part because the current standard salary level is too low to
fully perform its screening role, as it is now significantly below the
contemporary equivalent of the historical long test salary level ($942 per
week).[105] Moreover, as the Department explained in the NPRM, there is a need
for the Department to update the salary level to account for the shift to a
one-test system in the 2004 rule, which broadened the exemption by placing the
entire burden of this shift on employees who historically were entitled to the
FLSA's overtime protection because they performed substantial amounts of
nonexempt work and earned between the long and short test salary levels, but are
now exempt because they pass the more lenient standard duties test. This effect
would continue to grow over time in the absence of an increase to the current
$684 per week standard salary level.

The Department disagrees with the criticism from some commenters that this
rulemaking is premature due to the relative recency of the 2019 rule. In that
rule, the Department “reaffirm[ed] its intent to update the standard salary
level and HCE total annual compensation threshold more regularly in the future”
than it has in the past, noting that “long periods without updates . . .
diminish the usefulness of the salary level test and cause future increases to
be larger and more challenging for businesses to absorb.” [106] Notably, the
Department initially proposed in the 2019 NPRM to codify a commitment to update
the part 541 earnings thresholds on a quadrennial basis ( i.e., once every 4
years) through notice and comment rulemaking.[107] While that proposed
commitment was not adopted in the 2019 final rule, the Department reaffirmed the
importance of, and its commitment to, regular updates in its 2019 final rule.
The Department's 2019 final rule in no way suggested that increases to the part
541 earnings thresholds should occur only after some longer period of time.

Relatedly, the fact that employee salaries have grown substantially since 2019
underscores the need for this rulemaking. Commenter assertions to the contrary,
including that the federal minimum wage has not increased since the salary level
was last updated, misunderstand the purpose of the part 541 earnings thresholds,
which are intended to assist in the identification of EAP employees based on the
wages employees presently receive.[108] To the extent that employers have
already been providing raises to exempt EAP workers since January 1, 2020 (the
effective date of the 2019 final rule), as some commenters contended, those
increases should be appropriately reflected in the earnings thresholds to ensure
their effectiveness.

The Department is sensitive to commenter concerns about the potential impact of
this rulemaking on affected employers. However, as discussed in greater detail
in the regulatory impact analysis in section VII, the costs of this rule, while
significant, are a necessary byproduct of ensuring a salary level that works
effectively with the duties tests both now and in the future.

IV. EFFECTIVE DATE

The Department proposed that all aspects of the proposed rule would become
effective 60 days after publication of the final rule. This proposed effective
date was consistent Start Printed Page 32851 with the 60 days mandated for a
“major rule” under the Congressional Review Act and exceeded the 30-day minimum
required under the Administrative Procedure Act (APA).[109] The Department
recognized that the 60-day proposed effective date was shorter than the
effective dates for the 2004, 2016, and 2019 rules, which were between
approximately 90 and 180 days. The Department stated that a 60-day effective
date was appropriate, however, in part because employers and employees are
familiar with the procedures in the current regulations from the 2019 rulemaking
and changed economic circumstances have caused a strong need to update the
standard salary level. The Department also sought comments on whether to apply
different effective dates to different provisions of the proposed rule. The
Department is finalizing an effective date of July 1, 2024. The change to the
standard salary level methodology and the change to the HCE total annual
compensation methodology will have a delayed applicability date of January 1,
2025.[110] Accordingly, the standard salary level and HCE total annual
compensation requirement will increase at the initial update on the effective
date July 1, 2024 (to $844 and $132,964, respectively), again on the
applicability date for the new methodologies on January 1, 2025 (to $1,128 and
$151,164, respectively), and then every 3 years after the initial update on July
1 (using the methodology in effect at the time of each update).

The Department specifically asked for comments on whether the effective date for
the increase of the standard salary level should be 60 days after publication as
proposed or instead if the increase should be made effective at a later date,
such as 6 months or 1 year after publication of the final rule. If the effective
date were longer than 60 days, the Department sought comments on “whether it
should initially adjust the salary level to reflect recent wage growth (for
example, making an initial adjustment for wage growth 60 days after publication
of a final rule and having the final rule standard salary level be effective 6
months or a year after publication).” [111] Were it to follow such an approach,
the Department sought comments on the methodology it should use for an initial
update, specifically “whether to implement an initial update to the standard
salary level, effective 60 days after publication of a final rule, that uses the
current salary level methodology (the 20th percentile of weekly earnings of
full-time nonhourly workers in the lowest-wage Census Region and retail
nationally) and applies it to the most recent data available[.]” [112]

The Department did not specifically request comment on delaying the effective
date of the proposed HCE compensation threshold beyond 60 days or on making an
initial update using current data and the existing HCE compensation methodology
if it were to delay the effective date of the new total annual compensation
threshold. The Department stated that it believed a 60-day effective date was
appropriate for the proposed increase to the HCE compensation threshold because
only a relatively small number of employees earning between the current and
proposed HCE compensation thresholds would not meet the standard duties test and
be affected by the proposed change. The Department sought comment on the
proposed effective date for the HCE compensation threshold.

Lastly, the Department proposed that the first automatic update to the new
compensation levels be effective 3 years after the proposed 60-day effective
date. The Department sought comments on whether the date for the first automatic
update should be adjusted if it were to make an initial adjustment to any of the
compensation levels.

Many commenters that objected to the proposed rule also objected to the proposed
60-day effective date should the Department go forward with a final rule.
Commenters addressed their comments to the single 60-day effective date and
generally did not suggest different effective dates for different provisions.
Several commenters suggested effective dates between 90 and 180 days, which the
NPRM noted was the range for recent rules. See, e.g., HR Policy Association
(minimum of 90 days); International Foodservice Distributors Association (IFDA)
(minimum of 90 days); American Society of Travel Advisors (ASTA) (90 to 180
days); RILA (at least 120 days); NAIS/NBOA (at least 120 days). Several
commenters suggested a 180-day effective date. See, e.g., AASA/AESA/ASBO;
CUPA-HR; LeadingAge; NRF. The National Council of Young Men's Christian
Associations of the United States of America (YMCA) suggested an effective date
of at least 6 to 9 months. The United States Chamber of Commerce (Chamber),
National Association of Convenience Stores, and NAFCU suggested an effective
date of 12 months. Commenters including the U.S. Small Business Administration
Office of Advocacy (SBA Advocacy), National Automobile Dealers Association, and
Partnership to Protect Workplace Opportunity (PPWO) suggested an effective date
of 12 to 18 months. Commenters including Seyfarth Shaw LLP (Seyfarth Shaw) and
Credit Union National Association (CUNA) suggested an effective date of 150 days
to align with the proposed notice period for future update amounts. A number of
commenters suggested tying the effective date to the beginning of the next
calendar year (January 1, 2025). See, e.g., Seyfarth Shaw; SHRM; RILA; YMCA.
Some commenters suggested a longer time period between the publication and
effective date of the final rule for specific industries or types of employers.
See, e.g., Boy Scouts of America (requesting at least 12 months of lead time for
nonprofit employers); Small Business Majority (180 days for small businesses
with fewer than 50 employees). A few commenters linked the need for a longer
effective date with what they asserted was uncertainty as to the final salary
amount caused by the Department's projections in footnote 3 of the NPRM, with
NRF asserting that “[t]he brevity of the implementation period is particularly
problematic given the Department's . . . lack of clarity about the dollar value
of the proposed threshold.” See also HR Policy Association; RILA.

Several commenters suggested phasing in any increase in the salary level, often
in addition to an initial extension of the proposed effective date. Commenters
advocating for a phase-in suggested a range of steps or timeframes. See, e.g.,
ASTA (not less than 3 years); Chamber (3 years in even or incrementally larger
steps); North Carolina Center for Nonprofits (“multiple years”); National
Council of Nonprofits (two or more steps); PPWO (a period of years), Safe
Journeys (6 years); Washington Farm Labor Association (“multi-year”); YMCA
(proportional increases over 5 years).

Most commenters supporting the Department's proposal did not specifically
address the effective date for the Department's proposed changes. Commenters
including American Federation of Teachers (AFT), National Start Printed Page
32852 Partnership for Women & Families (National Partnership), and National
Women's Law Center (NWLC) urged the Department to finalize the rule “without
delay.” American Federation of State, County, and Municipal Employees (AFSCME)
specifically supported the 60-day effective date as proposed. A number of
commenters in the home and community-based health services sector, that were
generally supportive of the Department's intent but expressed concerns with its
proposal, advocated for a longer effective date. ANCOR suggested a 2-year
delayed effective date followed by a 3-to-5-year phase-in of the new salary
level. See also Advancing States (18-month to 2-year effective date); National
Association of State Directors of Developmental Disabilities Services (NASDDDS)
(18- to 24-month effective date for providers of services to individuals with
intellectual and developmental disabilities); United Cerebral Palsy (phase-in or
transition period for the Department to work with the Centers for Medicare and
Medicaid Services and the Administration for Community Living to minimize impact
on access to services). BrightSpring Health Services urged the Department to
delay the effective date for 2 years and to consider an enforcement delay for
the sector as it did in 2016.

As discussed below, the Department believes it is important to update the
standard salary level in part to account for substantial earnings growth since
the Department last updated the salary level in the 2019 rule. It has been more
than 4 years since the Department updated the salary level, and economic
conditions have changed significantly since then as evidenced by the salary
increase that would result by applying current data to the 2019 salary level
methodology ($844 per week, an increase of $160 per week over the existing
salary level). These economic conditions have also impacted employees subject to
the HCE exemption. Applying current data to the 2019 HCE compensation
methodology would result in an annual compensation threshold of $132,964 (an
increase of $25,551 over the existing compensation threshold).

At the same time, the Department is also mindful of the desire expressed by
multiple commenters to extend the effective date of the new standard salary and
annual compensation methodologies from the proposed 60-day period to 6-to-12
months (or more). A longer effective date for the new standard salary level and
HCE compensation methodologies would provide employers with more time to make
adjustments after they are informed of the exact levels of the thresholds set in
this final rule.

After considering the comments, the Department has determined that the final
rule will be effective on July 1, 2024, but the new standard salary level
methodology and the new HCE total annual compensation methodology will not be
applicable until January 1, 2025. The Department is setting the effective date
on July 1, 2024 rather than a set number of days after publication in the
Federal Register because it will further administrability for employers to have
the effective date coincide with the first of a month and some employers' budget
years also begin on that date.[113] While the rule will be effective on July 1,
2024, the Department is extending by an additional 6 months the time for
employers to comply with the new standard salary level methodology and the HCE
total annual compensation methodology. Accordingly, the applicability date for
§ 541.600(a)(2), which sets out the new standard salary level of the 35th
percentile of weekly earnings of full-time nonhourly workers in the lowest-wage
Census Region, and § 541.601(a)(2), which sets out the new HCE total annual
compensation level of the annualized earnings amount of the 85th percentile of
full-time nonhourly workers nationally, will be January 1, 2025. The Department
decided to delay application of the new HCE total annual compensation
methodology so that the new methodologies for both the standard salary level and
the HCE compensation level take effect at the same time. The delayed
applicability date will allow employers 6 additional months beyond the proposed
60-day effective date in which to evaluate employees who will be affected by the
new standard salary level methodology and the new HCE compensation level
methodology and make any adjustments.

New § 541.607, Regular updates to amounts of salary and compensation required,
will be applicable on the effective date July 1, 2024. Because the current
standard salary and HCE annual compensation levels have not been updated in more
than 4 years, and economic conditions have changed markedly during that time,
the first update will occur on that same date (§ 541.607(a)). Subsequent updates
will occur every 3 years after this date starting on July 1, 2027
(§ 541.607(b)). As discussed in section V.A, regular updating of the standard
salary and HCE annual compensation levels to reflect current wage data is
imperative to ensure that they continue to work effectively in combination with
the duties tests in defining bona fide EAP employees. In light of the
approximately 8-month delay in applicability of the new standard salary and HCE
total compensation methodologies, the initial update will use the current
methodologies from the 2019 rule, which result in a salary level of $844 per
week and an HCE total annual compensation threshold of $132,964. Accordingly,
the requirement that an exempt employee be compensated on a salary basis at a
salary level of at least $844 per week, set forth in § 541.600(a)(1), and that
an employee receive total annual compensation of at least $132,964 per year to
qualify for the HCE exemption, set forth in § 541.601(a)(1), will apply on July
1, 2024. The Department believes that this date for the initial update is
appropriate because it will use methodologies that employers are familiar with.
Subsequent triennial updates will apply the most recent four quarters of data to
the standard salary and HCE total annual compensation levels in effect at the
time of the updates. The Department anticipates that at the time of the first
triennial update, the salary and compensation methodologies that are in effect
will be the methodologies described in §§ 541.600(a)(2) and 541.601(a)(2) of
this final rule. The Department notes that the standard salary and HCE
compensation levels need to be updated regularly based on up-to-date earnings
data to ensure that they continue to function effectively regardless of the
methodology used to set the levels.

Except for the specific provisions discussed in this section that will become
applicable on January 1, 2025, all other provisions of this final rule will be
applicable on the effective date on July 1, 2024.

V. DISCUSSION OF FINAL REGULATORY REVISIONS

Consistent with its statutory duty to define and delimit the EAP exemption, the
Department is making several changes to the earnings thresholds provided in the
part 541 regulations. As explained in greater detail below, the Department is
setting the standard salary level at the 35th percentile of weekly earnings of
full-time salaried workers in the lowest-wage Census Region (currently the
South). The Department additionally is raising the HCE test's total annual
compensation requirement to the annualized equivalent of the 85th percentile of
weekly earnings of full-time salaried workers nationally. Finally, the Start
Printed Page 32853 Department is adopting a new mechanism to update the standard
salary level and the HCE total annual compensation threshold, initially on July
1, 2024 and every 3 years thereafter to ensure that they remain effective tests
for exemption. The Department is not making substantive changes to any
provisions related to the salary basis or job duties tests.

The primary changes to the existing regulations are in §§ 541.5, 541.600,
541.601, and newly added § 541.607. In addition, the Department is making
conforming changes throughout part 541 to update references to the applicable
salary level requirements.[114] The discussion below begins with the new
updating provision (§ 541.607), which will make an initial update to the salary
and compensation thresholds on July 1, 2024, followed by discussion of changes
to the standard salary level methodology (§ 541.600(a)(2)) and HCE total annual
compensation threshold methodology (§ 541.601(a)(2)), which will become
applicable on January 1, 2025. As noted in these sections, the Department
intends for the changes in this final rule to be severable. Severability is
addressed more fully at the end of the discussion of final revisions with a
discussion of the new severability provision (§ 541.5).

A. UPDATING THE STANDARD SALARY LEVEL AND TOTAL ANNUAL COMPENSATION THRESHOLD

As the Department stated in the NPRM, it has long recognized the need to
regularly update the earnings thresholds to ensure that they remain useful in
helping differentiate between exempt and nonexempt white-collar employees. In
each of its part 541 rulemakings since 2004, the Department has observed that a
salary level that is not kept up to date becomes obsolete as wages for nonexempt
workers increase over time.[115] Long intervals between rulemakings have
resulted in eroded earnings thresholds based on outdated earnings data that were
ill-equipped to help identify bona fide executive, administrative, and
professional employees. This problem was most clearly illustrated by the
stagnant salary levels in the regulations from 1975 to 2004, during which period
increases in the federal minimum wage meant that by 1991, earnings of a worker
paid the federal minimum wage exceeded the long test salary level for a 40-hour
workweek and came close to equaling the short test salary level.[116]

The Department proposed in the NPRM a mechanism to regularly update the earnings
thresholds to maintain their effectiveness. In a new § 541.607(a)(1) and
(b)(1), the Department proposed to update the standard salary level and the HCE
total annual compensation requirement every 3 years to reflect current earnings
data. The Department proposed in § 541.607(a)(2) and (b)(2) to make the
triennial updates using the methodologies proposed to set the thresholds in the
NPRM— i.e., the 35th percentile of weekly earnings of full-time nonhourly
workers in the lowest-wage Census Region (currently the South) for the standard
salary level and the annualized weekly earnings of the 85th percentile of
full-time nonhourly workers nationally for the HCE total annual compensation
requirement.[117] The NPRM also outlined in proposed § 541.607(c) the manner in
which the Department would publish advance notice of the updated thresholds and
included a pause mechanism in proposed § 541.607(d) that could be triggered to
delay a scheduled update under certain circumstances.

The Department proposed to make the first update under its proposed updating
mechanism 3 years after the effective date of the final rule. The effective date
of the final rule was in turn proposed to be 60 days after publication and to
apply to all aspects of the proposed rule, including the proposed methodologies
for the standard salary level and the HCE total annual compensation threshold.
As discussed in section IV, the Department specifically sought comments on
whether the effective date for the proposed change to the standard salary level
methodology (to the 35th percentile of weekly earnings of full-time salaried
workers in the lowest-wage Census Region) should be 60 days after publication as
proposed or if the change should be made effective at some later date, such as 6
months or 1 year after publication of the final rule.[118] If the effective date
were longer than 60 days, the Department sought comments on “whether it should
initially adjust the salary level to reflect recent wage growth (for example,
making an initial adjustment for wage growth 60 days after publication of a
final rule and having the final rule standard salary level be effective 6 months
or a year after publication).” [119] The Department also sought comments on what
methodology to use for the initial update, were it to follow such an approach.
In particular, the Department invited comments on “whether to implement an
initial update to the standard salary level, effective 60 days after publication
of a final rule, that uses the current salary level methodology (the 20th
percentile of weekly earnings of full-time nonhourly workers in the lowest-wage
Census Region and retail nationally) and applies it to the most recent data
available ($822 per week based on current data).” [120]

The Department received numerous comments on its proposed updating mechanism.
Many organizations representing employee interests as well as some employers
generally supported the updating mechanism, while most organizations
representing employer interests opposed it. Many of the commenters opposing the
proposed updating mechanism asserted that the Department lacked the authority to
institute such a mechanism. After considering the comments received, the
Department is finalizing the updating mechanism, with some modifications as
discussed below, to keep the salary and compensation thresholds up to date with
current data and maintain their effectiveness.

The first update under new § 541.607 will occur on July 1, 2024. As discussed in
section IV, the new standard salary level and HCE total annual compensation
threshold methodologies will not be applicable until January 1, 2025 (a total of
approximately 8 months Start Printed Page 32854 after publication of this final
rule). Accordingly, § 541.607(a) establishes an initial update on July 1, 2024
to the standard salary level and the HCE total annual compensation threshold
using the methodologies in place at that time ( i.e., the 2019 rule
methodologies), which results in a $844 per week standard salary level and a
$132,964 HCE total annual compensation threshold. Section 541.607(b) further
establishes future updates to the standard salary level and HCE total annual
compensation threshold with current earnings data beginning 3 years after the
date of the initial update, and every 3 years thereafter, using the
methodologies in place at the time of the updates. The Department anticipates
that by the time the first triennial update under the updating mechanism occurs
on July 1, 2027, assuming the Department has not engaged in further rulemaking,
the new methodologies for the standard salary level and HCE total annual
compensation requirement established by this final rule will be effective and
the triennial update would employ these new methodologies. In response to
commenter concerns, the Department is also adding clarifying language from the
NPRM preamble to the final regulatory text of the delay provision.

1. THE DEPARTMENT'S AUTHORITY TO ADOPT A SALARY LEVEL TEST

The updating mechanism in new § 541.607 will maintain the effectiveness of the
salary and compensation thresholds set in §§ 541.600 and 541.601 by adjusting
them regularly to reflect current economic data. At the outset, a small number
of commenters contended the Department lacked authority under section 13(a)(1)
to even include a salary level test in the regulations, advocating for the
Department to withdraw this rulemaking. See, e.g., AFPI; Job Creators Network
Foundation; NFIB; Pacific Legal Foundation. These commenters asserted that the
express terms of section 13(a)(1) do not permit the Department to include any
compensation-based requirements.

The Department maintains its longstanding position that the Secretary's express
authority to “define[ ]” and “delimit[ ]” the terms of the EAP exemption
includes the authority to use a salary level test as one criterion for
identifying employees who are employed in a “bona fide executive,
administrative, or professional capacity.” The Department has used a salary
level test since the first part 541 regulations in 1938. From the FLSA's
earliest days, stakeholders have generally favored the use of a salary
test,[121] and the Department's authority to use a salary test has been
repeatedly upheld,[122] including recently in Mayfield v. U.S. Dept. of
Labor.[123] Despite numerous amendments to the FLSA over the past 85 years,
Congress has not restricted the Department's use of the salary level tests in
the regulations. Significant regulatory changes involving the salary
requirements since 1938 include adding a separate salary level for professional
employees in 1940, adopting a two-test system with separate short and long test
salary levels in 1949, and creating a single standard salary level test and
establishing a new HCE exemption test in 2004. These changes were all made
through regulations issued pursuant to the Secretary's authority to define and
delimit the exemption. Despite having amended the FLSA numerous times over the
years, Congress has not amended section 13(a)(1) to alter these regulatory
compensation requirements.

The FLSA gives the Secretary power to “define[]” and “delimit[]” the terms “bona
fide executive, administrative, or professional capacity” through regulation.
Congress thus “provided that employees should be exempt who fell within certain
general classifications”—those employed in a bona fide executive,
administrative, or professional capacity—and authorized the Secretary “to define
and delimit those classifications by reasonable and rational specific
criteria.” [124] Therefore, the Department “is responsible not only for
determining which employees are entitled to the exemption, but also for drawing
the line beyond which the exemption is not applicable.” [125]

2. INITIAL UPDATE TO THE STANDARD SALARY LEVEL AND TOTAL ANNUAL COMPENSATION
THRESHOLD TO REFLECT THE CHANGE IN EARNINGS SINCE THE 2019 RULE

The Department received many comments regarding its proposed regulatory
mechanism for updating the standard salary level and the HCE total annual
compensation requirement to maintain their effectiveness. While commenters
disagreed on how and when the salary and total annual compensation thresholds
should be updated, commenters generally did not dispute that the earnings
thresholds need to be periodically updated to reflect current economic
conditions. Many commenters that opposed the proposed updating mechanism
nonetheless agreed that the thresholds in the regulations need to be
periodically updated. See, e.g., ASTA; FMI; SBA Advocacy; SHRM; TechServe
Alliance; World Floor Covering Association (WFCA).

In the context of addressing the Department's proposed standard salary level
methodology, several commenters generally expressed support for—or in opposing
the salary level suggested in the alternative—an increase to the salary level
using the 2019 methodology. See, e.g., Bellevue University; Center for Workplace
Compliance (CWC); RILA; YMCA. CWC noted that the 2019 methodology is
well-established and already familiar to employees and employers, and Bellevue
University similarly stated that this methodology “has been previously
field-tested on the U.S. economy[.]” As noted in section IV, commenters
generally did not address applying the 2019 methodology through the updating
mechanism.

The Department remains convinced that effective salary and compensation
thresholds must use up-to-date earnings data. This position is long-standing.
When the Department updated its salary level tests in 1949, for example, it
explained that the “relative ineffectiveness of these tests in recent years is
the result of changed economic conditions rather than any inherent weakness in
the tests[,]” and that the “increase in wage rates and salary levels gradually
weakened the effectiveness of the present salary tests as a dividing line
between exempt and nonexempt employees.” [126] The principle that effective
tests for exemption must use Start Printed Page 32855 up-to-date earnings data
remains as true today as it was 75 years ago.

The Department's need to update the standard salary level and HCE total annual
compensation requirement for current data in this rulemaking is distinct from
its decision to establish new methodologies for setting those thresholds. The
current salary and compensation levels have been in place for more than 4 years
and need to be updated to reflect current wage data to maintain their
effectiveness.[127] Since the Department's last rulemaking in 2019, there has
been significant change in salaried worker earnings.[128] The $684 standard
salary level is far below what constitutes the 20th percentile of weekly
earnings of full-time salaried workers in the South and/or in the retail
industry nationally using current data, which greatly undermines the utility of
the threshold as a means of helping distinguish exempt from nonexempt employees.
The same is true for the HCE total annual compensation threshold. Updating the
existing thresholds to reflect current earnings data is consistent with the
intent the Department has expressed repeatedly in its past part 541 rulemakings,
including in the 2019 rule, to periodically update the thresholds.

For these reasons, the Department is revising final § 541.607(a) to provide for
an initial update to the standard salary level and HCE total annual compensation
requirement with current earnings data on July 1, 2024. Specifically, the
standard salary level will be updated to the 20th percentile of weekly earnings
of full-time salaried workers in the South and/or in the retail industry
nationally using the most recent data, resulting in a standard salary level of
$844 per week. The HCE total annual compensation threshold will be updated to
the 80th percentile of full-time salaried worker earnings nationwide using the
most recent data, resulting in an annual compensation threshold of $132,964. The
Department believes that the July 1, 2024 effective date provides sufficient
time for employers to adjust to this initial update because the methodology used
for the initial update to the standard salary level has been used since 2004 and
is familiar to the regulated community. The size of the initial increase to the
standard salary level, which is $160 per week, is also less (in nominal terms)
than the $229 per week change that resulted from the 2019 rule.[129]

The initial update on July 1, 2024 and the change in the standard salary level
and HCE total annual compensation methodologies on January 1, 2025 will result
in two increases in the compensation thresholds within a 12-month period. The
Department recognizes that for some employers both changes to the compensation
thresholds may occur in the same budget year. Because both the amount of the
initial update and the subsequent increase to the thresholds are set forth in
this final rule, some employers may choose to make a single adjustment at the
first date that encompasses both the initial update and the impending change to
the standard salary level and the HCE total annual compensation threshold.[130]

The Department intends for the initial update of the standard salary level and
the HCE total annual compensation requirement, using current earnings data
applied to the 2019 rule methodologies, to be severable from future triennial
updates to the thresholds under § 541.607(b), as well as from the revision to
the methodologies for the standard salary level and the HCE total annual
compensation threshold discussed in section V.B and section V.C. In implementing
the initial update, the Department intends to account for changes in earnings
since the 2019 rule. In changing the methodology for the standard salary level,
the Department further intends to fully restore the salary level's historic
screening function and account for the shift in the 2004 rule from a two-test to
a one-test system for defining and delimiting the EAP exemption.[131] Lastly, in
changing the methodology for the HCE total annual compensation threshold, the
Department intends to ensure the HCE threshold's role as a streamlined
alternative for those employees most likely to meet the standard duties test by
excluding all but those employees “at the very top of [the] economic
ladder[.]” [132] These are independent objectives of this rulemaking and the
provisions implementing them can each stand alone. Therefore, the Department
intends for the initial update to remain in force even if the methodologies for
the standard salary level and/or the HCE total annual compensation threshold
established by this final rule are stayed or do not take effect. Similarly, the
Department intends for the initial update to remain in effect even if future
triennial updates under § 541.607(b) are stayed or do not take effect.

The initial update will take effect approximately 60 days after the publication
of the final rule, immediately coming out of this notice and comment rulemaking.
As such, the notice procedures set forth in § 541.607(b)(3) will not apply. As
discussed below, future triennial updates will be preceded by advance
publication of a notice of the updated salary level and HCE total annual
compensation threshold in the Federal Register . For the initial update, this
final rule provides notice of the updated salary and compensation levels.[133]

3. FUTURE TRIENNIAL UPDATES TO KEEP THE STANDARD SALARY LEVEL AND TOTAL ANNUAL
COMPENSATION THRESHOLD UP TO DATE

As the Department previously explained, the earnings thresholds are only an
effective indicator of exempt status if they are kept up to date. Left
unchanged, the thresholds become substantially less effective in helping
identify exempt EAP employees as wages for workers increase over time. To that
end, the Department proposed to triennially update the standard salary level and
HCE total annual compensation threshold by applying the most recent earnings
data to the methodologies set forth in proposed § 541.600(a)(1) and
§ 541.601(a)(1), while any change to the methodologies used to set the standard
salary level and HCE annual compensation threshold would be effectuated through
future rulemaking.

The Department received many comments on its proposed triennial updating
mechanism for keeping the thresholds up to date in the future, which are
addressed below. The comments were sharply divided on this aspect of the NPRM.
After considering the comments received, the Department concludes that
establishing a mechanism for resetting the standard salary level and HCE total
annual compensation requirement based on Start Printed Page 32856 current
earnings data, and on a regular 3-year schedule, will ensure that the thresholds
remain effective into the future and thus better serve to help define and
delimit the EAP exemption.

I. THE DEPARTMENT'S AUTHORITY TO UPDATE THE STANDARD SALARY LEVEL AND TOTAL
ANNUAL COMPENSATION THRESHOLD WITH CURRENT DATA IN THE FUTURE

The Department received many comments regarding its authority to update the
earnings thresholds through the proposed triennial updating mechanism. A
majority of the commenters opposing the updating mechanism challenged the
Department's authority to adopt such a provision. Most commenters that supported
the updating mechanism did not specifically discuss the Department's authority
to institute such a mechanism. As to commenters supporting the proposed
triennial updating mechanism that addressed the issue, they supported the
Department's authority.

Commenters favoring automatic updating, such as AFL-CIO and EPI, agreed with the
Department that just as the Department has authority to set salary thresholds
for the EAP exemption, it also has authority to provide for regular updates to
ensure the thresholds do not erode over time. Some supportive commenters further
emphasized that future updates would make no change to the standard ( i.e.,
methodology) by which the Department implements the FLSA, but rather merely
ensure that the standard accounts for current economic conditions. See, e.g.,
Administrative Law Professors; Democracy Forward Foundation; EPI. The
Administrative Law Professors similarly asserted that automatic adjustments to
the earnings thresholds fall within the Secretary's authority to define and
delimit “what it means to function in a `bona fide executive, administrative, or
professional capacity[.]' ” Observing that even a so-called “static” salary
threshold expressed in “non-indexed dollar terms” is constantly changing as a
matter of economic value, the Administrative Law Professors asserted that “if a
non-indexed salary threshold is lawful, as nobody seriously questions, so too is
a standard pegged to income percentile.” The Administrative Law Professors
observed “it is arguably more rational” for the Department to “proffer a
regulation that expressly accounts for the inevitably dynamic nature of every
salary threshold . . . rather than to permit arbitrarily fluid macroeconomic
conditions to dictate the threshold's true economic worth.”

On the other hand, many commenters opposing the proposed updating mechanism
asserted that the Department lacks statutory authority to update the thresholds
in this manner. Some of these commenters contended that since the FLSA does not
expressly authorize the Department to index the earnings thresholds unlike, for
example, the Social Security Act or the Patient Protection and Affordable Care
Act, it follows that the FLSA does not authorize the Department to automatically
update the thresholds. 134 See, e.g., CUPA-HR; International Dairy Foods
Association (IDFA); PPWO; RILA; Seyfarth Shaw. Several commenters pointed out
that Congress did not provide for automatic updating of any of the earnings
requirements under the FLSA, such as the minimum wage under section 6, the tip
credit wage under section 3(m), or the hourly wage for exempt computer employees
under section 13(a)(17). See, e.g., AFPI; FMI. Commenters including National
Restaurant Association and PPWO further asserted that Congress never amended the
FLSA to grant the Department explicit authority to index the salary level
despite knowing that the Department has updated the salary level on an irregular
schedule.

As the Department stated in the NPRM, the Department's authority to update the
salary level tests for the EAP exemption by regularly resetting them based on
existing methodologies is grounded in section 13(a)(1), which expressly gives
the Secretary broad authority to define and delimit the scope of the exemption.
Using this broad authority, the Department established the first salary level
tests by regulation in 1938. Despite numerous amendments to the FLSA over the
past 85 years, Congress has not restricted the Department's use of the salary
level tests. As just discussed, significant changes involving the salary
requirements made through regulations issued pursuant to the Secretary's
authority to define and delimit the exemption include adding a separate salary
level for professional employees in 1940, adopting the two-test system in 1949,
and switching to the single standard test and adding the new HCE test in 2004.
Despite having amended the FLSA numerous times over the years, Congress has not
amended section 13(a)(1) to alter these regulatory salary requirements.

Unlike the statutes some of the commenters referenced explicitly providing for
indexing, or the statutory FLSA wage rates— i.e., the minimum wage under section
6, the tip credit wage under section 3(m), or the hourly wage for exempt
computer employees under section 13(a)(17)—the part 541 earnings thresholds are
established in the regulations. Therefore, it is not surprising that the FLSA
contains no specific reference to the indexing or automatic adjustments of these
thresholds. The Department agrees with the Administrative Law Professors and
other commenters that stated that the Department has the authority to establish
a mechanism to automatically adjust the earnings thresholds to ensure their
continued effectiveness, using a process established through notice and comment
rulemaking, just as it has the authority to initially set them. The Department
believes the updating mechanism in this final rule fulfills its statutory
obligation to define and delimit the EAP exemptions by preventing the thresholds
from becoming obsolete and providing predictability and clarity for the
regulated community.

Many of the commenters opposed to the updating mechanism also asserted that
automatically updating the earnings thresholds would violate the APA's
rulemaking requirements expressly incorporated by reference in section 13(a)(1).
See, e.g., AFPI; FMI; National Club Association; and Wage and Hour Defense
Institute. These and other commenters claimed that the Department cannot
lawfully update the salary level without engaging in notice and comment
rulemaking for each update. See, e.g., AASA/AESA/ASBO; Competitive Enterprise
Institute; CWC; RILA. IFDA, for example, asserted that notice and comment
rulemaking needs to precede each future update so that stakeholders have the
opportunity to comment on and adequately prepare for any changes that will
affect them. AHLA commented that the proposal to update the thresholds
triennially without a preceding opportunity for comment is Start Printed Page
32857 “drastic and troublesome” and that “notice and comment will help ensure
that the knowledge, expertise, and vital input of interested stakeholders will
be considered before moving forward with increases.”

Relatedly, AFPI, NRF, and SBA Advocacy asserted that automatic updating would
violate the directive under section 13(a)(1) that the Department define and
delimit the EAP exemption “from time to time” by regulations. NRF, for example,
noted that Congress asked the Department to revisit the EAP exemptions from time
to time “expecting the Department to use its deep knowledge of the U.S. economy
in general, and labor market in particular, to establish appropriate parameters
for the exemptions” and contended that by implementing automatic updates the
Department evades that decision-making process. AFPI similarly asserted that the
“directive, `from time to time,' does not allow the Department to set it and
forget it.”

The Department disagrees with the assertion that triennial updates using the
compensation methodologies adopted in the regulations improperly bypass the
APA's—and section 13(a)(1) by reference—requirements for notice and comment
rulemaking. The Department is adopting an updating mechanism in this rulemaking
after publishing a notice of the proposed rule and providing opportunity for
stakeholders to comment in accordance with the APA's notice and comment
requirements. The Department has received and considered numerous comments on
the proposed updating mechanism. Future updates under the triennial updating
mechanism would simply reset the thresholds by applying current data to a
standard already established by notice and comment regulation, providing clarity
for the regulated community as to future changes in the thresholds. Therefore,
the Department disagrees with commenters that claimed that notice and comment
rulemaking must precede each future update made through the updating mechanism
even where the methodology for setting the compensation levels and the mechanism
for updating those levels would remain unchanged.[135] The updating mechanism
will not alter the Department's ability to engage in future rulemaking to change
the updating mechanism or any other aspect of the part 541 regulations at any
point.

The Department also disagrees with commenters that claimed section 13(a)(1)'s
“time to time” language precludes the Department from adopting an updating
mechanism. The updating mechanism would only ensure the standard salary level
and total annual compensation threshold remain at the percentiles established
through rulemaking. This does not preclude the Department from engaging in
future rulemaking “from time to time” if it determines that there is a need to
change the underlying methodologies for setting the standard salary level or HCE
total annual compensation threshold, the updating mechanism, or any other
substantive change to part 541, as the Department did, for instance, in 1940,
1949, 1958 1975, 2004, 2016, and 2019.

Many commenters opposing the updating mechanism referenced the Department's
prior statements to further support their assertion that the Department lacks
authority to implement automatic updating. In particular, commenters pointed to
the Department's decision not to institute an automatic updating mechanism in
the 2004 rule and its statement that “the Department finds nothing in the
legislative or regulatory history that would support indexing or automatic
increases.” See, e.g., NAM; NFIB; SBA Advocacy. Others, like PPWO, further
asserted that automatic updates are contrary to the Department's statement in
the 2004 rule that “[t]he salary levels should be adjusted when wage survey data
and other policy concerns support such a change.”

As stated in the NPRM, the Department's decision not to institute an automatic
updating mechanism in the 2004 and 2019 rulemakings in no way suggests that it
lacks the authority to do so. In its 2004 rule, the Department stated that it
found nothing in the legislative or regulatory history that would support
indexing or automatic increases.[136] As the Department elaborated in its 2016
rulemaking, there was likewise no such authority prohibiting automatic
updating.[137] The 2004 rule did not discuss the Department's statutory
authority to promulgate an updating mechanism through notice and comment
rulemaking or explore in detail whether automatic updates to the salary levels
posed a viable solution to problems created by lapses between rulemakings. As
the Department explained in the 2016 rule, the Department's reference in the
2004 rule to automatic updating simply reflected the Department's conclusion at
that time that an inflation-based updating mechanism, such as one based on
changes in the prices of consumer goods, that unduly impacts low-wage regions
and industries, would be inappropriate. Such concerns are not implicated here,
where the mechanism will update the salary level to keep it at the same
percentile of earnings of full-time salaried workers. As for concerns that the
salary level should be updated only when wage data warrants it, the updating
mechanism does just that—as the earnings thresholds will change only to the
extent earnings data in the relevant data sets have changed, whether upward or
downward as conditions dictate.

Similarly, the Department declined to adopt automatic updating in the 2019 rule
because it “believe[d] that it is important to preserve the Department's
flexibility to adapt to different types of circumstances,” [138] and not because
it lacked authority to do so. While the Department decided not to institute an
updating mechanism in its 2019 rule, it never said that it lacked the statutory
authority to do so. Upon further consideration, the Department concludes that
the best way to ensure the standard salary level and HCE total compensation
threshold remain up to date is a triennial updating mechanism that maintains the
Department's flexibility to adapt to different circumstances and change course
as necessary.

II. RATIONALE FOR CONTINUING TO UPDATE THE STANDARD SALARY LEVEL AND TOTAL
ANNUAL COMPENSATION THRESHOLD WITH CURRENT DATA IN THE FUTURE

The Department explained in the NPRM that its proposed updating Start Printed
Page 32858 mechanism would allow for regular and more predictable updates to the
earnings thresholds, which would benefit both employers and employees and would
better fulfill the Department's statutory duty to define and delimit the EAP
exemption by preventing the erosion of those levels over time. The Department
noted that its regulatory history, marked in many instances by lengthy gaps
between rulemakings, underscored the difficulty with updating the earnings
thresholds as quickly and regularly as necessary to keep pace with changing
employee earnings and to maintain the full effectiveness of the thresholds.
Through the proposed updating mechanism, the Department explained it would be
able to timely and efficiently update the standard salary level and the HCE
total annual compensation requirement by using the same methodologies as
initially proposed and adopted through notice and comment rulemaking to set the
thresholds. The Department noted that updating the thresholds in this manner
would prevent the more drastic and unpredictable increases associated with less
frequent updates and ensure that future salary level increases occur at a known
interval and in more gradual increments. The Department received many comments
on the rationale for implementing the proposed triennial updating mechanism.

Several organizations representing employee interests as well as a handful of
employers agreed with the Department that an updating mechanism would ensure the
thresholds keep pace with wages and retain their usefulness. See, e.g.,
Coalition of Gender Justice and Civil Rights Organizations; National
Partnership; National Education Association (NEA); National Employment Lawyers
Association (NELA); National Employment Law Project (NELP); Uncommon Goods; W.S.
Badger Company. Nichols Kaster, PLLP (Nichols Kaster) noted the updating
mechanism protects the thresholds from becoming outdated and irrelevant,
although it believed that annual updates would better reflect the economy. NELA
commented that “indexing represents the only simple and accurate” way to
preserve the real value of the standard salary level and the HCE total
compensation threshold through time, although they contended that the proposed
methodologies should be higher earnings percentiles.

Many commenters supportive of the updating mechanism also asserted that regular
updates would provide greater predictability for employers and employees alike.
See, e.g., AFL-CIO; Center for WorkLife Law at University of California Law and
Partner Organizations (Family Caregiving Coalition); Justice at Work; NEA. Small
Business Majority expressed support for the proposed updating mechanism noting
that smaller, predictable increases that are known well in advance—as opposed to
“large and sudden” increases—would allow small business owners to be better
prepared for any staffing or compensation changes they need to make. Nineteen
Democratic Senators commented that an updating mechanism is the most effective
way to provide consistency and stability for both workers and businesses. See
also, e.g., EPI; Washington State Department of Labor and Industries. CLASP
similarly noted the proposed updating provision would enable employers to know
exactly what to expect and when to expect it.

In contrast, many organizations representing employer interests disagreed with
the Department's rationale for the proposed updating mechanism. Several of these
commenters criticized the Department for stating that the updating mechanism is
a more “viable and efficient” means of updating the thresholds by asserting that
the Department is trying to avoid its obligation to engage in notice and comment
rulemaking simply because such rulemaking is resource-intensive. See, e.g.,
IDFA; National Restaurant Association; PPWO. The Chamber similarly commented
that the Department's history of long gaps in rulemaking is not an adequate
justification for adopting what it characterized as “a historically
unprecedented change.”

Commenters including AHLA, FMI, the National Beer Wholesalers Association, and
Seyfarth Shaw, asserted automatic updating would lead to uncertainty that would
pose administrative and compliance burdens on employers. Some commenters, such
as HR Policy Association and PPWO, asserted the proposed mechanism would make it
difficult to ascertain exactly what the threshold will be every 3 years. Other
commenters, including CUPA-HR, FMI, IDFA, and SHRM, asserted triennial updates
would have a significant financial impact on employers as they would need to
account for the cost of salaries or potential overtime as well as the cost of
conducting reclassification analysis and implementing the necessary changes
every 3 years. Some nonprofit organizations and providers of home and
community-based health services expressed concern that future updates would be
difficult for the nonprofit sector because of their funding sources. See, e.g.,
Allegheny Children's Initiative; ANCOR.

Some commenters opposing the updating mechanism claimed automatic updates would
hinder the Department from considering economic circumstances when making
updates. Ten Republican Senators asserted automatic updates “blind the
administration to critical considerations about the state of the economy and the
workforce, including the unemployment rate, inflation, job vacancies, or whether
employers are in a position to adjust to the increases without shedding jobs.”
Some commenters, including Illinois College, ISSA, and the Society of
Independent Gasoline Marketers of America, expressed concern that the proposed
mechanism could lead to updates happening at a time of economic downturn or a
recession and could further exacerbate those economic conditions. Others
expressed concern that the updating mechanism would hinder future rulemaking to
change the earnings thresholds. See, e.g., Chamber; National Association of
Convenience Stores.

The Department continues to believe that the updating mechanism will ensure the
earnings thresholds keep pace with changes in earnings and remain useful in the
future in helping to delineate EAP employees from non-EAP employees. Whereas a
fixed salary level threshold becomes less effective over time as the data used
to set it grows outdated, a fixed methodology remains relevant if applied to
contemporaneous data. The Department agrees with the commenters that stated that
the updating mechanism's triennial updates would provide greater certainty and
predictability for the regulated community. Unlike irregular updates to the
earnings thresholds, which may result in drastic changes to the thresholds,
regular updates on a pre-determined interval and using an established
methodology will produce more predictable and incremental changes. For this
reason, the Department disagrees with the assertion by some commenters that
regular updates will lead to unpredictable adjustments and ongoing uncertainty.
The Department also disagrees with commenters like HR Policy Association that
claimed the proposed mechanism will make it difficult to ascertain what exactly
the threshold will be every 3 years. Through the updating mechanism, the
Department will reset the standard salary level and total annual compensation
threshold using the most recent, publicly available, U.S. Bureau of Labor
Statistics (BLS) data on earnings for salaried workers. Therefore, Start Printed
Page 32859 stakeholders will be able to track where the thresholds would fall on
a quarterly basis by looking at the BLS data [139] and can estimate the changes
in the thresholds even before the Department publishes the notice with the
adjusted thresholds in the Federal Register . The Department believes that,
compared to the irregular updates of the past, stakeholders will be better
positioned to anticipate and prepare for future updates under the updating
mechanism.

Moreover, the Department does not agree with the assertion that routine updates
would lead to undue increases at a time of economic downturn or recession. If
anything, the Department's new updating mechanism will ensure that the
thresholds match the earnings data as they exist at the time of the update,
whether by increasing or decreasing the earnings thresholds as warranted by the
data. As discussed below, the Department's decision to deviate from the 2016
rule by adopting a mechanism for pausing future updates further guards against
such concerns. Similarly, nothing about the updating mechanism precludes the
Department from revisiting the standard salary level and HCE total annual
compensation methodologies in the future when conditions warrant. Having
considered the comments received, the Department remains convinced that an
updating mechanism providing for regular updates on a triennial basis is the
best means of ensuring that the salary and compensation tests continue to
provide an effective means, in tandem with the duties tests, to distinguish
between EAP and non-EAP employees.

III. SPECIFIC FEATURES OF THE UPDATING MECHANISM

The Department received many comments regarding the various aspects of the
proposed updating mechanism, including the updating frequency, methodology,
notice period, and pause mechanism. The Department proposed in § 541.607(a) and
(b) to update the earnings thresholds every 3 years by using the same
methodology used in the regulations to set the thresholds. Specifically,
proposed § 541.607(a)(2) and (b)(2) stated that the methodologies for setting
the standard salary level and HCE annual compensation threshold in the NPRM
would be used for future updates.

Many commenters that supported the proposed updating mechanism expressed a
preference for more frequent updates. See, e.g., Coalition of State AGs; Jobs to
Move America; NEA; NELP. Commenters including AFL-CIO, National Partnership, and
Nichols Kaster asserted annual updates, compared to triennial updates, offered
better predictability and would ensure that the salary threshold keeps pace with
the changes in wages. EPI similarly observed that annual updates would ensure
that the salary threshold more closely adheres to the chosen percentile “rather
than slipping further and further behind in between triennial updates[.]”

Most commenters that opposed updating did not separately comment on the updating
frequency, but some addressed it in the context of discussing the impact of the
updating mechanism on employers. Many of these commenters claimed triennial
updates would impose substantial financial and compliance burdens on employers
as they would need to engage in reclassification analysis and implement
necessary changes to adjust to the updated thresholds every 3 years. See, e.g.,
ABC; CUPA-HR; HR Policy Association; NAM. Most of the commenters opposing the
updating mechanism did not suggest an alternative updating frequency.
Notwithstanding their objection to automatic updating, however, a few
commenters, including AHLA, ASTA, WFCA, and YMCA, suggested a longer updating
frequency ranging from 4 to 6 years.

The Department agrees with the commenters that stated annual updates would keep
the salary level more up to date given that employee earnings are constantly
changing. However, as stated in the NPRM, the Department is also mindful of the
potential burden that possible changes to the tests for exemption on an annual
basis would impose on employers, including costs associated with evaluating the
exemption status of employees on an annual basis. Conversely, the Department is
not convinced by commenter claims that triennial updates would impose an undue
financial and compliance burden on employers. Many of these commenters did not
address the fact that the alternative to automatic updating is not a permanent
fixed earnings threshold, but instead larger changes to the threshold that could
occur during irregular future updates. Since the updating mechanism will change
the thresholds regularly and incrementally, and based on actual earnings of
salaried workers, the Department predicts that employers will be in a better
position to be able to adjust to the changes resulting from triennial updates.
The Department remains persuaded that triennial updates are frequent enough to
ensure that the part 541 earnings thresholds are kept up to date—and continue to
serve the purpose of helping to identify exempt employees—while not being overly
burdensome for employers. The final rule, therefore, adopts an updating
frequency of 3 years as proposed.

The comments regarding the method through which the Department's proposed
updating mechanism would reset the salary and compensation thresholds were also
divided. Commenters favoring routine updates also supported the proposal to
update the thresholds using the fixed percentile approach—to keep the thresholds
at the same percentile of earnings of full-time salaried worker as established
by the regulations. NELA, for example, asserted that updating the thresholds
using a fixed percentile of earnings “is the fairest way to maintain consistency
in workers' FLSA eligibility in light of inevitable economic change.” EPI
similarly noted updating the thresholds through the proposed methodology ensures
that the standard under the Department's rule “is simply preserved—neither
strengthened nor weakened.”

Commenters that opposed automatic updating opposed the proposed updating
methodology. Several of these commenters reiterated an assertion from comments
on the 2016 rulemaking that the proposed updating mechanism—tied to a fixed
percentile—would result in the salary level being “ratcheted” upward over time
due to the resulting actions of employers. See, e.g., Chamber; NAM; NRF
(including a report by Oxford Economics); SBA Advocacy. The commenters contended
that in response to each automatic update, most employers would either
reclassify employees earning below the new salary level to hourly status or
raise the salaries of those employees to keep their exempt status. These
responses, the commenters claimed, would skew the relevant data for future
updates in favor of substantial increases because those employees who were
reclassified as hourly would fall out of the data pool causing the data pool to
be smaller and skew towards higher-paid workers. See, e.g., Chamber; National
Association of Convenience Stores; National Restaurant Association; NRF. While
expressing a strong preference that automatic updates be abandoned altogether,
some of the commenters concerned about this possible effect suggested that the
Department adopt an updating mechanism tied to an inflation-related index. See
Seyfarth Shaw; SHRM.

The Department notes that very similar comments concerning an alleged Start
Printed Page 32860 “ratcheting” effect were received during the 2016 rulemaking,
which also proposed an updating mechanism based on earnings percentiles. In
response to those comments, the Department examined historical data to determine
the impact of its previous salary increase.[140] Specifically, the Department
looked at the share of full-time white-collar workers paid on an hourly basis
before and after the 2004 rule (January-March 2004; January-March 2005) both
below and above the standard salary level. The Department found that following
the 2004 rule, the share of full-time white-collar workers being paid hourly
actually decreased marginally in the group below the standard salary level and
increased slightly in the group above the standard salary level.[141]

The Department finds the claim that updating with a fixed percentile methodology
would lead to the “ratcheting” upward of the thresholds to be unsubstantiated.
The “ratcheting” claim is almost entirely based on the assumption that employers
will respond to an automatically updated salary level by converting all or a
large number of newly nonexempt workers to hourly status, thus removing them
from the data set of full-time salaried workers. Yet none of the commenters
advancing this claim presented any tangible data or evidence to support their
assumption. Even those few commenters that provided economic analyses rested
their views on the same unsubstantiated assumption that employers will generally
reclassify newly nonexempt employees as hourly. See, e.g., NRF (including a
report by Oxford Economics); PPWO (quoting a study by Edgeworth Economics).[142]
The results of the Department's close examination of the impact of the 2004
salary level increase provide no evidence that salary level increases due to
regular triennial updating will result in employers converting significant
numbers of affected EAP workers to hourly pay status and thus raising potential
concerns about skewing future updates. Although many commenters made nearly
identical ratcheting claims in this rulemaking, none of the commenters addressed
the Department's analysis in response to those same claims in the 2016 rule.

Having found no merit in the “ratcheting” claim, the Department declines to
adopt the alternative methodologies suggested such as an updating mechanism tied
to an inflation-related index. As noted in the NPRM, the fixed percentile
approach, as opposed to other methods such as indexing the thresholds for
inflation, eliminates the risk that future levels will deviate from the
underlying salary setting methodology established through rulemaking. During the
2016 rule, the Department extensively considered whether to update the
thresholds based on changes in the Consumer Price Index for All Urban Consumers
(CPI-U)—a commonly used economic indicator for measuring inflation.[143] The
Department chose to update the thresholds using the same methodology used to
initially set them in that rulemaking ( i.e., a fixed percentile of weekly
earnings of full-time salaried workers in the lowest-wage Census Region),
observing that the objectives that justify setting the salary level using a
fixed percentile methodology also supported updating the thresholds using the
same methodology.[144] The Department is persuaded that updating the earnings
thresholds by applying the same methodology used to originally set the levels
instead of indexing them for inflation best ensures that the earnings thresholds
continue to fulfill their objective of helping effectively differentiate between
bona fide EAP employees and those who are entitled to overtime pay and work
appropriately with the duties test.

New § 541.607 therefore establishes triennial updates of the standard salary
level and the HCE total compensation threshold using the same methodologies used
to set those thresholds. Assuming the Department has not engaged in further
rulemaking, the Department anticipates the second update under the updating
mechanism—which will occur 3 years after the date of the initial update
discussed in section V.A—will use the methodologies established by this final
rule as those will become effective before the second update. Accordingly, the
second update will reset the standard salary level to the 35th percentile of
weekly earnings of full-time workers in the lowest-wage Census Region and will
reset the HCE total annual compensation threshold to the annualized weekly
earnings of the 85th percentile of full-time salaried workers nationally based
on contemporaneous data at that time.

The Department further proposed to publish in the Federal Register a notice with
the adjusted standard salary level and the HCE total annual compensation
threshold at least 150 days before the date the adjusted thresholds are set to
take effect and to publish the updated thresholds on WHD's website no later than
their effective date. The Department proposed to update both thresholds using
the most recent available 4 quarters of data, as published by BLS, preceding the
publication of the Department's notice with the adjusted levels. The Department
received fewer comments regarding these aspects of the proposal than on the
updating mechanism itself.

Most commenters supporting the proposed updating mechanism did not separately
comment on the 150-day notice period. Some commenters opposing automatic updates
asserted that the 150-day notice period would not be adequate time to prepare
for compliance with the new updated thresholds. See, e.g., Association of Public
and Land-grant Universities (APLU) (suggesting 180-day advance notice); Chamber
(suggesting at least 1 year notice); National Association of Convenience Stores
(same); The American Association of Advertising Agencies (The 4As) (same).
Regarding the data set, EPI suggested the Department use the most recent quarter
of data asserting that the salary threshold would be “suppressed” for 2 out of
every 3 years if the Department adopts triennial updates. On the other hand, the
National Association of Convenience Stores, while opposing automatic updating,
recommended the Department use the most recent 6 quarters of data, or those
quarters minus the 2 most recent, to account for changes it claimed employers
may make preemptively to adjust to an upcoming update for budgetary reasons.

After considering the comments received, the Department is persuaded that a
notice period of not less than 150 days provides sufficient time for employers
to make the necessary adjustments to comply with the updated thresholds. This is
especially true given that employers will be able to access the data set that
will be used to make the adjustments as published by BLS and anticipate the
extent of the adjustment even before the Department publishes the notice. A
period substantially longer than 150 days would hinder the Department's ability
to ensure that the thresholds that take effect are based on the most up-to-date
data. Similarly, the Department believes that using the most recent available 4
quarters of data will account for the Department's goal that Start Printed Page
32861 the thresholds reflect prevailing economic conditions while balancing the
concerns of commenters that wanted a longer or shorter period for the data set.
Therefore, the final rule establishes that for future updates under the updating
mechanism, the Department will publish in the Federal Register a notice with the
adjusted thresholds not fewer than 150 days before the date the new adjusted
thresholds are set to take effect and will publish the updated thresholds on the
WHD website no later than their effective date. The updates will be based on the
most recent available 4 quarters of data as published by BLS.

Lastly, the Department's proposal included a provision providing for the delay
of a scheduled update under the updating mechanism while the Department engages
in notice and comment rulemaking to change the earnings requirements and/or
updating mechanism, where economic or other conditions merit. The Department
explained that the delay would be triggered if the Department publishes an NPRM
proposing to change the salary level methodology and/or modify the updating
mechanism by the date on which it publishes the notice of the revised salary and
compensation thresholds. In that instance, the notice with the adjusted
thresholds must state that the scheduled update will be paused for 120 days from
the day the update was set to occur while the Department engages in rulemaking,
and that the pause will be lifted on the 121st day unless the Department
finalizes a rule changing the salary level methodology and/or automatic updating
mechanism by that time. In the event the Department does not issue a final rule
by the prescribed deadline, the pause on the scheduled update will be lifted and
the new thresholds will take effect on the 121st day after they were originally
scheduled to take effect. The Department also explained the 120-day pause would
not affect the date for the next scheduled triennial update given the relative
shortness of the delay and so as not to disrupt the updating schedule. The next
update, therefore, would occur 3 years from the date on which the delayed update
would have originally been effective.

The Department received somewhat mixed comments regarding its proposed pausing
mechanism. For example, notwithstanding their objection to automatic updating
(and in some cases, certain aspects of the pause mechanism), some employer
organizations such as CUNA, AHLA, and the National Association of Professional
Insurance Agents commended the Department for recognizing that there may be
circumstances that may require temporarily delaying a scheduled update. Some
commenters that supported the updating proposal agreed. For example, the
Coalition of State AGs described the delay provision as “a fail-safe mechanism”
that would provide the Department flexibility to adjust to changed circumstances
as necessary. On the other hand, Sanford Heisler Sharp, while otherwise favoring
the updating mechanism, objected to the pause feature asserting that it would
“inject uncertainty into the administration of the threshold, undermining the
stated purpose of the NPRM to simplify enforcement of overtime and minimum wage
protections.”

Some commenters took issue with the phrase “unforeseen economic or other
conditions” in the NPRM's preamble which generally described the circumstances
in which the Department may trigger the pause mechanism. AHLA, CUNA, and
NAIS/NBOA asserted it is not clear what circumstances would constitute
“unforeseen economic or other conditions.” AFPI similarly pointed out the phrase
was found only in the preamble and not in the proposed § 541.607. American
Council of Engineering Companies expressed concern that the proposed pause
mechanism does not provide sufficient flexibility for the Department to respond
to unexpected economic conditions and recommended that the provision be modified
to allow the Secretary “to suspend automatic updates if economic conditions
warrant.” RILA asserted the pause feature is an inflexible process asserting
that if a catastrophic event were to occur within 150 days of the date of a
scheduled update, the Department would have no flexibility or ability to delay
or stop the update. A few commenters claimed that the 120-day pause period is
not sufficient time to provide the Department the flexibility it needs to adjust
to unforeseen circumstances or complete a rulemaking. See, e.g., National
Association of Convenience Stores; NRF.

Most of the comments objecting to or otherwise criticizing the pause mechanism
seem to assume the only way the Department can alter a scheduled update or
change any other aspect of the rule is through the updating mechanism's pause
provision. That is not correct. Nothing in the proposed updating mechanism
limits the Department's ability to engage in future rulemaking to change any
aspect of the part 541 regulations at any time. The pause mechanism offers the
Department added flexibility—in addition to its ability to engage in rulemaking
at any time to change the rule—by allowing it the ability to delay a scheduled
update as it engages in rulemaking. As the Department noted in the NPRM, the
pause mechanism offers the Department 270 days—150 days before, and 120 days
after, the effective date for the scheduled update—to complete the rulemaking
process. The Department can still engage in rulemaking outside of this period
and through that rulemaking can stop or delay a scheduled update or change any
other aspect of the part 541 regulations. This is true regardless of whether the
Department adopts the delay provision. The Department believes that the pause
provision will provide additional flexibility in the context of the triennial
updates and will not impact the Department's normal rulemaking powers.

The Department recognizes that the phrase “unforeseen economic or other
conditions” was not in proposed § 541.607 and agrees that the lack of this
language in the regulatory text creates ambiguity about the standard for pausing
a triennial update. Therefore, the Department is revising § 541.607(d) to
include similar language. The Department believes this revision clarifies the
standard for when the pause mechanism may be triggered but does not impinge on
the Department's normal authority to engage in rulemaking for other reasons. The
Department is disinclined to further define what circumstances would trigger the
pause mechanism, as some commenters suggested. In proposing the pause mechanism,
the Department was mindful of previous statements from stakeholders, and the
Department's own prior statements, about the need to preserve flexibility to
adapt to unanticipated circumstances. As an example, the Department referenced
the COVID pandemic and its widespread impact on workplaces. However, it is not
feasible for the Department to outline every possible circumstance that could
warrant a delay of a scheduled update. Doing so would unduly limit the
Department's flexibility to adjust to truly unanticipated circumstances.

For these reasons, the Department has concluded that the proposed pause
mechanism, with the modification noted above, provides the Department sufficient
flexibility to adopt to unforeseen circumstances where necessary. Therefore, the
new § 541.607(b)(4) establishes that the Department can trigger the pause, where
unforeseen economic or other Start Printed Page 32862 conditions warrant, by
issuing an NPRM proposing to change the salary level methodology and/or modify
the updating mechanism by the date on which it publishes the notice with the
adjusted salary and compensation thresholds. Section 541.607(b)(4) further
clarifies that the notice with the adjusted thresholds must state that the
scheduled update will be paused for 120 days from the day the update was set to
occur while the Department engages in rulemaking, and that the pause will be
lifted on the 121st day unless the Department finalizes a rule changing the
salary level methodology and/or automatic updating mechanism by that time.

Lastly, as discussed in more detail in section V.D, the Department intends for
the triennial updates of the standard salary level and the HCE total annual
compensation threshold using current earnings data to be severable from the
revision to those methodologies discussed in section V.B and section V.C. In
implementing routine triennial updates, the Department intends to ensure that
the salary and compensation thresholds set in the regulations reflect changes in
earnings data and continue to function effectively in helping identify exempt
white-collar employees. As already noted, the Department has different
objectives for changing the methodologies for setting the standard salary level
and HCE total annual compensation threshold. Specifically, in changing the
methodology for the standard salary level, the Department intends to fully
restore the salary level's historic screening function and account for the shift
in the 2004 rule from a two-test to a one-test system for defining and
delimiting the EAP exemption.[145] In changing the methodology for the HCE total
annual compensation threshold, the Department intends to ensure the HCE
threshold's role as a streamlined alternative for those employees most likely to
meet the standard duties test by excluding all but those employees “at the very
top of [the] economic ladder[.]” [146] These are independent objectives of this
rulemaking and the provisions implementing them can each stand alone. Therefore,
the Department intends for the triennial updates to remain in force even if the
methodologies for the standard salary level and the HCE total annual
compensation threshold established by this final rule are stayed or do not take
effect. Similarly, the Department intends for the triennial updates under
§ 541.607(b) to remain in force even if the initial update for wage growth in
§ 541.607(a) is stayed or does not take effect.

B. STANDARD SALARY LEVEL

In its NPRM, the Department proposed to update the salary level by setting it
equal to the 35th percentile of earnings of full-time salaried workers in the
lowest-wage Census Region (the South), resulting in a proposed salary level of
$1,059 per week ($55,068 for a full-year worker). The proposed salary level
methodology built on lessons learned in the Department's most recent rulemakings
to more effectively define and delimit employees employed in a bona fide EAP
capacity. Specifically, the Department's intent in the NPRM was to fully restore
the salary level's screening function and account for the switch in the 2004
rule from a two-test system to a one-test system for defining the EAP exemption,
while also updating the standard salary level for earnings growth since the 2019
rule.

The Department is finalizing the proposed standard salary level methodology and
applying it to the most recent available earnings data, resulting in a salary
level of $1,128 per week ($58,656 for a full-year worker). Setting the standard
salary level at the 35th percentile of weekly earnings of full-time salaried
workers in the lowest-wage Census Region will, in combination with the standard
duties test, better define and delimit which employees are employed in a bona
fide EAP capacity in a one-test system. Because the salary level is above the
equivalent of the long test salary level, the final rule will (unlike the 2004
and 2019 rules) ensure that lower-paid white-collar employees who perform
significant amounts of nonexempt work, and were historically considered by the
Department not to be employed in a bona fide EAP capacity because they failed
the long duties test, are not all included in the exemption. At the same time,
by setting the salary level well below the equivalent of the short test salary
level, the final rule will address potential concerns that the salary level test
should not be determinative of EAP exemption status for too many white-collar
employees. The combined result will be a more effective test for exemption. The
final salary level will also reasonably distribute between employees and their
employers what the Department now understands to be the impact of the 2004 shift
from a two-test to a one-test system on employees earning between the long and
short test salary levels.

1. HISTORY OF THE SALARY LEVEL

The FLSA became law in 1938 and the first version of the part 541 regulations,
issued later that year, set a minimum compensation requirement of $30 per week
for executive and administrative employees.[147] Since then, the Department has
increased the salary levels eight times—in 1940, 1949, 1958, 1963, 1970, 1975,
2004, and 2019.

In 1940, the Department maintained the $30 per week salary level for executive
employees but established a higher $200 per month salary level test for
administrative and professional employees. In selecting these thresholds, the
Department used salary surveys from Federal and state government agencies,
experience gained under the National Industrial Recovery Act, and Federal
government salaries to determine the salary level that was a reasonable
“dividing line” between employees performing exempt and nonexempt work.[148]

In 1949, recognizing that the “increase in wage rates and salary levels” since
1940 had “gradually weakened the effectiveness of the present salary tests as a
dividing line between exempt and nonexempt employees,” the Department calculated
the percentage increase in weekly earnings from 1940 to 1949, and then adopted
new salary levels at a “figure slightly lower than might be indicated by the
data” to protect small businesses.[149] In 1949, the Department also established
a short test for exemption, which paired a higher salary level with a less
rigorous duties test. The justification for this short test was that employees
who met the higher salary level were more likely to meet all the requirements of
the exemption (including the 20 percent limit on nonexempt work), and thus a
“short-cut test of exemption . . . would facilitate the administration of the
regulations without defeating the purposes of section 13(a)(1).” [150] Employees
who met only the lower long test salary level, and not the higher short test
salary level, were required to satisfy the long duties test, which included a
limit on the amount of nonexempt work that an exempt employee could perform. The
two-test system remained part of the Department's regulations until 2004. In
1958, the Department reiterated that salary is a “mark of [the] status” of an
exempt employee and reinforced the importance of salary as an enforcement tool,
adding that the Department had Start Printed Page 32863 “found no satisfactory
substitute for the salary tests.” [151] To set the salary levels, the Department
considered data collected during 1955 WHD investigations on the “actual salaries
paid” to employees who “qualified for exemption” ( i.e., met the applicable
salary and duties tests in place at the time) and set the salary levels at $80
per week for executives and $95 per week for administrative and professional
employees.[152] The Department set the long test salary levels so that only a
limited number of employees performing EAP duties (about 10 percent) in the
lowest-wage regions and industries would fail to meet the new salary level and
therefore become entitled to overtime pay.[153] In laying out this methodology,
often referred to as the “Kantor” methodology and generally referenced in this
rule as the “long test” methodology, the Department echoed its prior comments
stating that the salary tests “simplify enforcement by providing a ready method
of screening out the obviously nonexempt employees.” [154]

The Department followed a similar methodology when determining the appropriate
long test salary level in 1963, using data regarding salaries paid to exempt
workers collected in a 1961 WHD survey.[155] The salary level for executive and
administrative employees was increased to $100 per week, and the professional
exemption salary level was increased to $115 per week.[156] The Department noted
that these salary levels approximated the methodology used in 1958 to set the
long test salary levels.[157]

The Department continued to use a similar methodology when it updated the salary
levels in 1970. After examining data from 1968 WHD investigations, 1969 BLS wage
data, and information provided in a report issued by the Department in 1969 that
included salary data for executive, administrative, and professional
employees,[158] the Department increased the long test salary level for
executive and administrative employees to $125 per week and increased the long
test salary level for professional employees to $140 per week.[159]

In 1975, instead of following the previous long test methodology, the Department
set the long test salary levels “slightly below” the amount suggested by
adjusting the 1970 salary levels for inflation based on increases in the
Consumer Price Index.[160] The long test salary level for executive and
administrative employees was set at $155, while the professional level was set
at $170. The salary levels adopted were intended to be interim levels “pending
the completion and analysis of a study by [BLS] covering a six-month period in
1975[,]” and were not meant to set a precedent for future salary level
increases.[161] The envisioned process was never completed, however, and the
“interim” salary levels remained unchanged for the next 29 years.

The short test salary level increased in tandem with the long test level
throughout the various rulemakings between 1949 and 2004. Because the short test
was designed to capture only those white-collar employees whose salary was high
enough to indicate a stronger likelihood of being employed in a bona fide EAP
capacity and thus warrant a less stringent duties requirement, the short test
salary level was always set significantly higher than the long test salary level
(approximately 130 percent to 180 percent of the long test level).

When the Department updated the part 541 regulations in 2004, it created a
single standard test for exemption instead of retaining the two-test system from
prior rulemakings. The Department set the new standard salary level at $455 per
week and paired it with a duties test that was substantially equivalent to the
less rigorous short duties test. The Department set a salary level that would
exclude from exemption roughly the bottom 20 percent of full-time salaried
employees in each of two subpopulations: (1) the South and (2) the retail
industry nationally. In setting the salary level the Department looked to
earnings data for all white-collar workers—exempt and nonexempt—and looked to a
higher percentile than the long test methodology (10th percentile of exempt
workers in low-wage industries and areas). The Department acknowledged, however,
that the salary arrived at by this method was, at the time, equivalent to the
salary derived from the long test method using contemporaneous data.[162]

In the 2016 rule, the Department set the standard salary level equal to the 40th
percentile of weekly earnings of full-time salaried workers in the lowest-wage
Census Region (the South). This resulted in a standard salary level of $913 per
week, which was at the low end of the historic range of short test salary
levels. The Department explained that the increase in the standard salary level
was needed because, in moving from a two-test to a one-test system, the 2004
rule exempted lower-salaried employees performing large amounts of nonexempt
work who had historically been, and should continue to be, covered by the
overtime compensation requirement.[163] Since the standard duties test was
equivalent to the short duties test, the Department asserted that a salary level
in the short test salary range—traditionally 130 to 180 percent of the long test
salary level—was necessary to address this effect of the 2004 rule. As explained
earlier, the U.S. District Court for the Eastern District of Texas held the 2016
rule invalid.

In the 2019 rule, the Department reapplied the methodology for setting the
standard salary threshold from the 2004 rule, setting the salary level equal to
the 20th percentile of weekly earnings of full-time salaried workers in the
South and/or in the retail sector nationwide.[164] This methodology addressed
concerns that had been raised that the 2016 methodology excluded too many
employees from the exemption based on their salary alone and produced the
current standard salary level of $684 per week (equivalent to $35,568 per
year).[165] Unlike in 2004, however, where the 20th percentile of weekly
earnings of full-time salaried workers in the South and retail nationally was
essentially the same as the long test, in 2019 this methodology now produced a
salary level amount that was lower than the equivalent of the long test salary
level using contemporaneous data ($724 per week, $37,648 per year). Put another
way, the salary level set in the 2019 rule was $40 per week below the long test
level (used to validate the salary level in the 2004 rule) and $292 per week
below the low end of the short test range (used to set the salary level in the
2016 rule).

2. STANDARD SALARY LEVEL PROPOSAL

In its NPRM, the Department proposed to update the salary level by setting it
equal to the 35th percentile of earnings of full-time salaried workers in the
lowest-wage Census Region (the Start Printed Page 32864 South), resulting in a
proposed salary level of $1,059 per week ($55,068 for a full-year worker). The
Department's proposal explained that fully restoring the salary level's
screening function required setting a salary level at least equal to the long
test salary level. The Department elaborated that prior to the 2019 rule (when
the Department set the salary level $40 per week below the long test level),
employees who earned below the long test salary level were screened from the EAP
exemption by virtue of their pay—either by the long test salary level itself or,
in the case of the 2004 rule, a standard salary level set equal to the long test
salary level. The Department stated that the long test salary level provided
what it believed should be the lowest boundary of the new salary level
methodology because it would ensure the salary level's historic screening
function was restored.

In selecting the proposed salary level methodology, the Department also
considered the impact of its switch in 2004 to a one-test system for determining
exemption status. The Department explained that a single-test system cannot
fully replicate both the two-test system's heightened protection for employees
performing substantial amounts of nonexempt work and its increased efficiency
for determining exemption status for employees who are highly likely to perform
EAP duties. Rather than reinstate the long duties test with its limitation on
nonexempt work, the Department examined earnings ventiles that would produce a
salary level between the long and short test salary levels (which were,
respectively, equivalent to between the 26th and 27th percentiles, and the 53rd
percentile, of full-time salaried worker earnings in the lowest-wage Census
Region). The Department explained that the long and short tests had served as
the foundation for nearly all the Department's prior rulemakings, either
directly under the two-test system, or indirectly as a means of evaluating the
Department's salary level methodology under the one-test system, and therefore
were useful parameters. The Department concluded that setting the salary level
equal to the 35th percentile would, in combination with the standard duties
test, more effectively identify in a one-test system who is employed in a bona
fide EAP capacity in a manner that reasonably distributes among employees
earning between the long and short test salary levels and their employers the
impact of the Department's move to a one-test system.

After reviewing the comments received, the Department is finalizing its proposal
to set the standard salary level equal to the 35th percentile of full-time
salaried worker earnings in the lowest-wage Census Region (the South), which is
below the midpoint of the long and short test salary levels. Applying this
methodology to data for calendar year 2023 results in a salary level of $1,128
per week ($58,656 annually for a full-year worker). This approach will fully
restore the salary level's function of screening obviously nonexempt workers
from the EAP exemption, and account for the switch in the 2004 rule to a
one-test system in a way that reasonably distributes the impact of this shift
among employees earning between the long and short test salary levels and their
employers. The resulting salary level will work effectively with the standard
duties test to better define who is employed in a bona fide EAP capacity.

3. SALARY LEVEL TEST FUNCTION AND EFFECTS

For 85 years, the Department's regulations have consistently looked at both the
duties performed by the employee and the salary paid by the employer in defining
and delimiting who is a bona fide executive, administrative, or professional
employee exempt from the FLSA's minimum wage and overtime protections. From 1949
to 2004, the Department determined EAP exemption status using a two-test system
comprised of a long test (a lower salary level paired with a more rigorous
duties test that limited performance of nonexempt work to no more than 20
percent for most employees) and a short test (a higher salary level paired with
a less rigorous duties test that looked to the employee's primary duty and did
not have a numerical limit on the amount of nonexempt work). The two-test system
facilitated the determination of whether white-collar workers across the income
spectrum were employed in a bona fide EAP capacity, and employees who met either
test could be classified as EAP exempt.

In a two-test system, the long test salary level screens from the exemption the
lowest-paid white-collar employees, thereby ensuring their right to overtime
compensation. The Department has often referred to many of the employees who are
screened from the exemption by virtue of their earning below the lower long test
salary level as “`obviously nonexempt employees[.]' ” [166] The long test salary
level helped distinguish employees who were not employed in a bona fide EAP
capacity because the Department found that employees who were screened from
exemption by the long test salary level generally did not meet the other
requirements for exemption.[167] Since 1958, the long test salary level was
generally set to exclude from exemption approximately the lowest-paid 10 percent
of salaried white-collar employees who performed EAP duties in the lowest-wage
regions and industries.[168] The long test salary level also served as a line
delimiting the population of white-collar employees for whom the duties test
determined their exemption status. In the two-test system, this duties analysis
included an examination of the amount of nonexempt work performed by
lower-salaried employees, which ensured that these employees were employed in an
EAP capacity by limiting the amount of time they could spend on nonexempt work.
The duties and salary level tests worked in tandem to properly define and
delimit the exemption: lower-paid workers had to satisfy a more rigorous duties
test with strict limits on nonexempt work, and higher-paid employees were
subject to a less rigorous duties test because they were more likely to satisfy
all the requirements of the exemption (including the limit on nonexempt
work).[169]

Because employees who met the short test salary level were paid well above the
long test salary level, the short test salary level did not perform the same
function as the long test salary level of screening obviously nonexempt
employees. Instead, the short test salary level was used to determine whether
the full duties test or the short-cut duties test would be applied to determine
EAP exemption status. The exemption status of employees paid more than the long
and less than the short test salary levels was determined by applying the more
rigorous long duties test that ensured overtime protections for employees who
performed substantial amounts of nonexempt work. The exemption status of
employees paid at or above the higher short test salary level was determined by
the less rigorous short duties test that looked to the employee's primary duty
and did not cap the amount of nonexempt work an employee could perform. The
short test thus provided a faster and more efficient duties test based on the
Department's experience Start Printed Page 32865 that employees paid at the
higher short test salary level “almost invariably” met the more rigorous long
duties test, including its 20 percent limit on nonexempt work, and therefore a
shortened analysis of duties was a more efficient test for exemption
status.[170]

In 2004, rather than updating the two-test system, the Department chose to
establish a new, single-test system for determining exemption status. The new
single standard test for exemption used a duties test that was substantially
equivalent to the less rigorous short duties test in the two-test system.[171]
Since the creation of the standard test, the Department has taken two different
approaches to set the standard salary level that pairs with the standard duties
test.

In 2004, as noted above, the Department set the new salary level roughly
equivalent to the 20th percentile of weekly earnings of full-time salaried
workers in the South and in the retail industry nationwide.[172] The Department
acknowledged that the salary level ($455 per week) was, in fact, equivalent to
the lower long test salary level amount under the two-test system using
contemporaneous data.[173] Because it was equivalent to the long test salary
level, the standard salary test continued to perform the same initial screening
function as the long test salary level: employees who historically were entitled
to overtime compensation because they earned below the long test salary level
remained nonexempt under the new standard test.

Without a higher salary short test, however, all employees who met the standard
salary level were subject to the same duties test. Since the single standard
duties test was equivalent to the short duties test, some employees who
previously did not meet the long duties test met the standard duties test. As a
result, the shift from a two-test to a one-test system significantly broadened
the EAP exemption because employees who historically had not been considered
bona fide EAP employees were now defined as falling within the exemption and
would not be eligible for overtime compensation. This broadening specifically
impacted lower-paid, salaried white-collar employees who earned between the long
and short test salary levels and performed substantial amounts of nonexempt
work. Under the two-test system, these employees had been entitled to overtime
compensation if their nonexempt duties exceeded the long test's strict 20
percent limit on such work. Under the 2004 standard test, these employees became
exempt because they met both the low standard salary level and the less rigorous
standard duties test, which does not have a numerical limit on the amount of
nonexempt work.

The Department's discussion of the elimination of the long duties test in the
2004 rule focused primarily on the minimal role played by the long test at that
time due to the erosion of the long salary level, and on the difficulties
employers would face if they were again required to track time spent on
nonexempt work when the dormancy of the long duties test meant that they had
generally not been performing such tracking for many years.[174] While asserting
that employees who were then subject to the long test would be better protected
under the higher salary level of the new standard test, the Department in the
2004 rule did not compare the protection lower salaried employees would receive
under the standard test with the protection they would have received under an
updated long test with a salary level based on contemporaneous data and the
existing long duties test.

To address the concern that lower-salaried employees performing large amounts of
nonexempt work historically were not considered bona fide EAP employees and thus
should be entitled to overtime compensation, in 2016 the Department set the
standard salary level at the 40th percentile of weekly earnings of full-time
salaried workers in the lowest-wage Census Region (the South). This methodology
produced a salary level ($913 per week) that was at the low end of the
historical range of short test salary levels, which had traditionally been
paired with the short duties test, and above the midpoint between the long and
short test salary levels.[175] This approach restored overtime protection for
employees performing substantial amounts of nonexempt work who earned between
the long and short test salary levels, as they failed the new salary level test.
However, this approach generated potential concerns that the salary level test
should not be determinative of exemption status for too many individuals.
Specifically, the 2016 rule's narrowing of the exemption prevented employers
from using the exemption for employees who earned between the long test salary
level and the low end of the short test salary range and would have met the more
rigorous long duties test. Prior to 2004, employers could use the long test to
exempt these employees, and under the 2004 rule these employees remained exempt
under the one-test system. Thus, while the 2016 rule accounted for the absence
of the long duties test by restoring overtime protections to employees earning
between the long test salary level and the low end of the short test salary
range who perform significant amounts of nonexempt work, it also made a group of
employees who had been exempt under the two-test system newly nonexempt under
the one-test system: employees earning between the long test level and the short
test salary range who perform only limited nonexempt work.

In its 2019 rule, the Department determined that the 2016 rule had not
sufficiently considered the impact of the increased standard salary level on
employers' ability to use the exemption for this group of lower-paid employees
who performed only limited amounts of nonexempt work.[176] The Department
emphasized that “[f]or most . . . employees the exemption should turn on an
analysis of their actual functions, not their salaries,” and that the 2016
rule's effect of making nonexempt lower-paid, white-collar employees who
traditionally were exempt under the long test “deviated from the Department's
longstanding policy of setting a salary level that does not `disqualify[] any
substantial number of' bona fide executive, administrative, and professional
employees from exemption.” [177] To address these concerns, the Department
simply returned to the 2004 rule's methodology for setting the salary threshold.
Applying the 2004 method to the earnings data available in 2019 produced a
standard salary level of $684 per week, which was below the equivalent of what
the long test salary level would have been using contemporaneous data ($724 per
week).[178] The 2019 rule was the first time the Department paired the standard
duties test with a salary level that was not at least equivalent to the long
test level.

The 2019 rule, like the 2004 rule, exempted all employees who earned between the
long and short test salary levels and performed too much nonexempt work to meet
the long duties test, but passed the standard duties test (equivalent to the
short duties test). The 2019 rule also for the first time permitted the
exemption of a group of low-paid white-collar employees (those Start Printed
Page 32866 earning between $684 and $724 per week) who had always been protected
by the salary level test's initial screening function—either under the long test
or under the 2004 rule salary level that was equivalent to the long test salary
level. The Department stated that the standard salary level's “fairly small
difference” from the long test level did not justify using the long test
methodology to set the salary level and emphasized that its approach preserved
the salary level's principal function as a tool for screening from exemption
obviously nonexempt employees.[179] In response to commenter concerns about the
2019 rule exempting employees who traditionally earned between the long and
short test salary levels and received overtime compensation because they did not
meet the long duties test, the Department cited the legal risks posed by the
2016 methodology (drawing on the district court's decisions as evidence) and
explained that such employees were already exempt in the years leading up to
2004 because the Department's outdated salary levels had rendered the long test
with its more rigorous duties requirement largely dormant.[180] As in the 2004
rule, the Department did not address the protection such lower salaried
employees would have received had the Department updated the long test using
contemporary data.

As explained in the NPRM, the Department's experience with a one-test system
shows that it is less nuanced than the two-test system, which allowed for finer
calibration in defining and delimiting the EAP exemption. In a two-test system,
there are four variables (two salary levels and two duties tests) that can be
adjusted to define and delimit the exemption. In a one-test system, there are
only two variables (one salary level and one duties test) that can be adjusted,
necessarily yielding less nuanced results. The loss in precision does not impact
the lowest-paid white-collar employees, who were screened from exemption by the
long test salary level, because they maintain their right to overtime pay so
long as the standard salary level is set at least equivalent to the lower long
test salary level—a condition that was met by the 2004 rule's salary level but
not by the 2019 rule's salary level. Instead, the Department's experience shows
that the shift from a two-test system to a one-test system impacts employees
earning between the long and short test salary levels and, in turn, employers'
ability to use the exemption for these employees.

In the two-test system, employees who earned between the long and short test
salary levels and performed large amounts of nonexempt work were protected by
the long duties test, while bona fide EAP employees in that earnings range who
performed only limited amounts of nonexempt work were exempt. Meanwhile, the
short test provided a time-saving short-cut test for higher-earning employees
who would almost invariably pass the more rigorous, and thus more time
consuming, long duties test. But the more rigorous long duties test, with its
limitation on the amount of nonexempt work that could be performed, was always
core to the two-test system, with the higher short test salary level and less
rigorous short duties test serving as a time-saving mechanism for employees who
would likely have met the more rigorous long duties test.[181]

As explained in the NPRM, one way in a one-test system to ensure appropriate
overtime protection to lower-salaried employees earning between the long and
short test salary levels who were historically entitled to overtime compensation
under the long test would be to reinstate the long duties test with its
limitation on nonexempt work. A one-test system with a more rigorous duties test
would appropriately emphasize the important role of duties in determining
exemption status. However, the Department did not propose in this rulemaking to
replace the standard duties test with the long duties test or to return to a
two-test system with the long duties test. The Department has not had a one-test
system with a limit on nonexempt work other than from 1940 to 1949,[182] when
the Department replaced this approach with its two-test system, and the two-test
system was replaced 20 years ago. Returning to the two-test system would
eliminate the benefits of the current duties test, including having a single
test with which employers and employees are familiar.

In light of these considerations, the Department's goal in this rulemaking is
not only to update the single standard salary level to account for earnings
growth since the 2019 rule through the use of the updating mechanism, but also
to build on the lessons learned in its most recent rulemakings to more
effectively define and delimit employees employed in a bona fide EAP capacity.
Consistent with its broad authority under section 13(a)(1), the Department's aim
is to have a single salary level test that will work effectively with the
standard duties test to better define who is employed in a bona fide EAP
capacity and will both fully perform the salary level's initial screening
function and account for the change to a single-test system.

4. DISCUSSION OF COMMENTS AND FINAL STANDARD SALARY LEVEL

I. OVERALL COMMENTER FEEDBACK

The Department received a significant number of comments in response to its
proposal to set the standard salary level equal to the 35th percentile of weekly
earnings of full-time salaried workers in the lowest-wage Census Region.
Numerous commenters supported the Department's proposed salary level. Supporters
included thousands of individual employees, writing separately or as part of
comment campaigns, and many groups representing employees or employee interests.
See, e.g., American Association of Retired Persons (AARP); AFSCME; AFT; NEA;
Restaurant Opportunities Center United; United Auto Workers Region 6; United
Steelworkers; WorkMoney. Many other commenters, including advocacy groups,
academics, and State officials also supported the Department's proposal. See,
e.g., Administrative Law Professors; CLASP; Coalition of Gender Justice and
Civil Rights Organizations; Coalition of State AGs; Common Good Iowa; EPI; The
Leadership Conference on Civil and Human Rights; National Partnership; NWLC. A
number of supportive commenters urged the Department to set a higher salary
level than the one it proposed. See, e.g., AFL-CIO; Demos; Nichols Kaster;
Sanford Heisler Sharp; SEIU; Winebrake & Santillo, LLC (Winebrake & Santillo). A
minority of employers, including most notably a campaign of small business
commenters, also supported the proposed salary level. See, e.g., Business for a
Fair Minimum Wage; Dr. Bronners; Firespring; Small Business Majority. Some
members of Congress also commented in support of the proposed salary level. See
19 Democratic Senators; 10 Democratic Representatives; U.S. Representative
Maxwell Frost (D-FL).

Commenters that supported increasing the salary level often emphasized that the
FLSA's minimum wage and overtime requirements are fundamental employee
protections, intended to spread employment to more workers and provide extra
Start Printed Page 32867 compensation (above the statutory minimum) to employees
who work more than 40 hours in a week. See, e.g., AARP; AFL-CIO; Coalition of
State AGs; NELA; NELP; Nichols Kaster; United Steelworkers. Some supportive
commenters, including Sanford Heisler Sharp, Texas RioGrande Legal Aid, and
Washington State Department of Labor and Industries, stressed that the EAP
exemption was premised in part on the expectation that exempt employees received
high salaries and other privileges to compensate for their long hours of work
and lack of FLSA protections. Other commenters similarly stressed that the
exemption is intended for employees who, based on the nature of their work and
their compensation, have sufficient bargaining power not to need the Act's
protections. See, e.g., Business for a Fair Minimum Wage; CLASP; NELP; NWLC.

Supportive commenters often also emphasized that the salary level test has an
important and longstanding role in helping define which employees are employed
in a bona fide executive, administrative, or professional capacity. Some
commenters, including AARP and NELA, stressed that the salary level provides an
important “bright line” test for helping determine exemption status, and NWLC
similarly stated that the salary level provides a “clear, objective, and
straightforward” test that is “easy for employers to apply and for employees to
understand[.]” NELP, quoting testimony from EPI at a 2015 Congressional hearing
on this issue, stated that salary level tests have been used since the
Department's earliest part 541 regulations because the “ ‘final and most
effective check on the validity of the claim for exemption is the payment of a
salary commensurate with the importance supposedly accorded the duties in
question.’ ” The Coalition of State AGs stated that a salary level that is too
low “no longer accurately delimits the boundaries of who is an EAP” employee.

The vast majority of employers and commenters supporting employer interests
opposed the proposed salary level. As discussed in section III, many employer
representatives opposed any salary level increase and urged the Department to
withdraw its proposal. See, e.g., AHLA; Americans for Prosperity; Chamber;
CUPA-HR; FMI; NAM; National Restaurant Association; Oregon Restaurant and
Lodging Association; PPWO; Wisconsin Bankers Association. Some Members of
Congress also opposed the proposed salary level and urged that the proposal be
withdrawn. See 10 Republican Senators; 16 Republican Representatives; U.S.
Senator Mike Braun (R-IN). Some commenters opposed to the proposal, writing
separately or as part of comment campaigns, expressed general opposition to the
rule but did not specifically address what, if any, salary level increase they
would support in a final rule. See, e.g., American Dental Association; Humane
Society of Manatee County; National Sporting Goods Association. Others that
opposed or questioned any salary level change stated, in the alternative, what
method they preferred if the Department updated the salary level in the final
rule. Most such commenters favored applying the methodology that the Department
used to set the salary level in its 2004 and 2019 rulemakings (the 20th
percentile of earnings of full-time salaried workers in the South and in the
retail industry nationally) or updating for inflation the current salary level,
which was set using that methodology. See, e.g., ABC; CWC; NAM; National
Restaurant Association. A handful of employer commenters supported, or stated
that they did not oppose, an increase based on the 2004/2019 methodology
(resulting in a salary level of $822 per week based on data used in the NPRM),
citing, for example, that this approach promoted predictability, see RILA, and
accounted for regional and industry-specific differences, see YMCA. See also,
e.g., SHRM; WFCA. Others supported or suggested a salary level that was higher,
but below the Department's proposed level. See, e.g., American Society of
Association Executives; Ho-Chunk, Inc.; University System of Maryland.

Commenters that opposed the Department's proposal almost always objected to the
size and/or timing of the proposed salary level increase rather than to the
existence of the salary test itself. Most employer commenters, whether favoring
no increase or a smaller increase, presumed the salary level test's continued
existence and lawfulness, with some, such as National Restaurant Association,
expressly referencing their support for the 2019 rule's salary level increase.
As discussed in detail below, many commenters acknowledged the salary level's
longstanding function of screening obviously nonexempt employees from the
exemption. See section V.B.4.ii. Other commenters that opposed the proposal
nonetheless cited benefits of having a salary level test, including helping to
ensure that the EAP exemption is not abused, see, e.g., AASA/AESA/ASBO, Bellevue
University, and “sav[ing] investigators and employers time by giving them a
quick, short-hand test[.]” See National Restaurant Association. APLU recognized
“DOL's mission and responsibility to update the Fair Labor Standards Act
overtime regulations and ensure a baseline of protections for our nation's
workers, including periodic updates to the minimum salary threshold for overtime
exemptions.” In rather stark contrast, AFPI asserted that employee
“[c]ompensation is no more helpful than would be a dress code test” in
determining exemption status. AFPI was one of only a small number of commenters,
as previously discussed in section V.A.1, that asserted the Department lacks
authority under section 13(a)(1) to adopt a salary level test. See, e.g., Job
Creators Network Foundation; NFIB; Pacific Legal Foundation.

As the Department stated in its 2019 rule, an employee's salary level “is a
helpful indicator of the capacity in which an employee is employed, especially
among lower-paid employees.” [183] The amount an employee is paid is also a
“valuable and easily applied index to the `bona fide' character of employment
for which exemption is claimed,” as well as the principal “delimiting
requirement . . . prevent[ing] abuse” of the exemption.[184] As the Department
has explained, if an employee “is of sufficient importance . . . to be
classified” as a bona fide executive employee, for example, and “thereby exempt
from the protection of the [A]ct, the best single test of the employer's good
faith in attributing importance to the employee's services is the amount [it]
pays for them.” [185] Employee compensation is a relevant indicator of exemption
status given that, as many commenters observed, the EAP exemption is premised on
the understanding that individuals who are employed in a bona fide executive,
administrative, or professional capacity typically earn higher salaries and
enjoy other privileges to compensate them for their long hours of work, setting
them apart from nonexempt employees entitled to overtime pay. [186] Start
Printed Page 32868 Accordingly, the Department agrees with the overwhelming
majority of commenters that, explicitly or implicitly, supported the salary
level continuing to have a role in helping determine whether employees are
employed in a bona fide executive, administrative, or professional
capacity.[187]

The Department nonetheless recognizes that commenters had a wide range of views
about the salary level test and that no salary level methodology can satisfy all
stakeholders. As discussed below, competing commenter views were often grounded
in differing opinions about the salary level test's role in defining the EAP
exemption. Broadly speaking, commenters that opposed the proposal generally
favored a far more limited role for the salary level test and emphasized
perceived negative effects on employers of the proposed increase, while
commenters that supported the proposal or urged the Department to set a higher
salary level often deemed the proposal modest by historical standards and
emphasized perceived positive effects on employees of the proposed increase.
Against this backdrop, the Department has reviewed the comments received on its
proposed methodology, with particular focus on feedback on the NPRM's rationale
that the proposed methodology will better define and delimit the EAP exemption
by fully restoring the salary level's screening function and accounting for the
switch from a two-test to a one-test system.

II. FULLY RESTORING THE SALARY LEVEL'S SCREENING FUNCTION

Some employer advocates that opposed the Department's proposal emphasized the
salary level's limited function of screening obviously nonexempt employees from
the EAP exemption. See, e.g., Independent Community Bankers of America; IFDA;
National Council of Farmer Cooperatives (NCFC); SHRM. Many employer
representatives stated that the proposed salary level exceeded this purpose by
excluding from the exemption too many employees who pass the duties test,
particularly in low-wage regions and industries. See, e.g., Chamber; NAW; PPWO;
RILA; Seyfarth Shaw. AFPI quoted the statement in the Department's 2019 rule
that any salary level increase must “have as its primary objective the drawing
of a line separating exempt from nonexempt” employees, and the Chamber asserted
that to the extent employee “protection or fairness” concerns motivated the
proposed increase, such considerations exceed the Department's statutory
authority.

Employer representatives that focused on the salary level's screening function
often contrasted the Department's proposal with prior rules that they stated met
this objective. CWC referenced the Department's 1958 and 2004 rules as such
examples, while AHLA stated more broadly that the Department historically set a
salary level that was “intentionally low” to screen out nonexempt employees, and
that the Department's proposed methodology “is objectively not the low end of
the salary range as that has been understood since 2004[.]” Other commenters
similarly cited the 2004 and 2019 rules as fulfilling the salary level test's
screening function, with National Restaurant Association, for example,
emphasizing the salary level's screening function when explaining that the “2004
methodology's chief virtue is its consistency with historical practice.” See
also, e.g., Bellevue University. Some commenters, including NCFC and PPWO,
stated that the proposed salary level would change the salary level from a
“screening device” to a “de facto sole test” for exemption, while others
cautioned that the salary level set in the 2016 rule was declared invalid for
exceeding this screening function. See also, e.g., Argentum & ASHA; NAM.

Though some employee representatives addressed the salary level's screening
function, they generally emphasized other considerations that they believed
justified setting a salary level equal to or higher than what the Department
proposed. A number of commenters stated that, along with the duties test, the
salary level “is intended to set a guardrail so that employers do not
incorrectly classify lower-paid salaried employees as” exempt. See, e.g.,
AFSCME; Family Values @ Work; North Carolina Justice Center; United
Steelworkers; Yezbak Law Offices. Similarly alluding to the salary level's
screening function, AFL-CIO emphasized that until 2019 the Department had never
set the salary level below the long test level and that as a result more than
half of the employees affected by the proposed salary level would have been
nonexempt under every prior rule (because they earned below the long test or
long test-equivalent salary level). EPI similarly stated that the 2019 rule set
a salary level “that was even lower than what the long-test methodology would
have yielded.” See also Coalition of State AGs (referencing the salary level's
screening function).

The Department has considered commenter feedback about the salary level test's
screening function. The Department agrees with all commenters that emphasized
the salary level test's function of screening obviously nonexempt employees from
the exemption, a principle that, as the Department observed in the 2019 rule and
in the NPRM, “has been at the heart of the Department's interpretation of the
EAP exemption for over 75 years.” [188] Fully effectuating the salary level's
screening function is a key part of ensuring that the salary level sets an
appropriate dividing line separating exempt and nonexempt employees. In response
to the Chamber's concern about the motivations underlying the proposed salary
level, the Department notes that while its proposal protects employees and
promotes fairness (by helping ensure that only employees employed in a bona fide
executive, administrative, or professional capacity are deprived of the FLSA's
minimum wage and overtime protections), these beneficial effects are a byproduct
of any higher salary level, not a basis for the proposed salary level.

As the Department explained in its NPRM, the concept of the salary level's
screening function dates back to the two-test system, when the lower long test
salary level provided “a ready method of screening out the obviously nonexempt
employees, making an analysis of duties in such cases unnecessary.” [189] When
the Department updated the long test in 1958, it reaffirmed the long test
salary's function as a screening tool.[190] When the Department moved to a
one-test system in 2004, the standard salary test had to perform the initial
screening function that the long test salary level performed in the two-test
system. In the 2004 rule, the Department reaffirmed its historical statements
emphasizing the salary level's critical screening function and, most
significantly, used the long test salary level methodology to validate its new
salary level of $455 per week.[191] The Department stressed in its final rule
that both the 2004 rule standard salary level methodology and the long test
salary level methodology “are capable of Start Printed Page 32869 reaching
exactly the same endpoint” and demonstrated that the two methods, in fact,
produced equivalent salary levels using contemporaneous data.[192] By setting a
salary level equivalent to the long test level, the Department ensured that
employees earning at levels that would have entitled them to overtime
compensation under the two-test system because they earned below the long test
salary level remained screened from the exemption by the new standard salary
test, regardless of whether they met the less rigorous standard duties test. The
Department rejected requests from commenters that supported a salary level that
was $30 to $95 lower than the level the Department ultimately adopted,[193] thus
maintaining the historic screening function by declining to set a salary level
lower than the long test level.

In its 2019 rule, the Department reemphasized the salary level's screening
function.[194] The Department distinguished the 2016 rule, which was invalidated
because it “ ‘untethered the salary level test from its historical
justification' of `[s]etting a dividing line between nonexempt and potentially
exempt employees' by screening out only those employees who, based on their
compensation level, are unlikely to be bona fide executive, administrative, or
professional employees.” [195] In contrast, the Department explained, reapplying
the 2004 methodology to contemporaneous data was likely to pass muster because
the district court that invalidated the 2016 rule “endorsed the Department's
historical approach to setting the salary level” and “explained that setting
`the minimum salary level as a floor to screen[ ] out the obviously nonexempt
employees' is `consistent with Congress's intent.’ ” [196]

In its NPRM, the Department explained that it needed to set a salary level at
least equal to the long test—$925 per week, equating to between the 26th and
27th percentiles of weekly earnings of full-time salaried workers in the
South—to fully restore the salary level's screening function. As noted above,
employer commenters that emphasized the salary level's screening function
generally viewed this function (which they often construed narrowly) as a
justification for limiting the size of any potential salary increase. However,
such commenters did not directly address the NPRM's explanation of the long test
salary level's key role in the salary level's screening function or the
relationship between the 2004/2019 methodology and the long test. Other
commenters that endorsed the screening function as embodied in the 2004 rule did
not grapple with the fact that in the 2019 rule, that methodology did not fully
fulfill that function because it no longer arrived at the same endpoint as prior
rules ( i.e., a long test or long-test equivalent salary level).

The Department's position remains that a core function of the salary level test
is to screen from the EAP exemption employees who, based on their low pay,
should receive the FLSA's overtime protections. For decades under the
Department's two-test system, the long test salary level performed this
screening function. In the 2004 rule, the Department used a different approach
to reach the same outcome—setting a single salary level test that was equivalent
to, and thus set the same line of demarcation as, the long test salary level.
The Department deviated from this approach in 2019, setting a salary level that
was $40 per week below the level produced using the long test methodology.[197]
In doing so, the Department for the first time expanded the exemption to include
employees who were paid below the equivalent of the long test salary level.

The Department reaffirms its position stated in the NPRM that the salary level
test must equal at least the long test salary level in order to fulfill its
historical screening function. From 1938 to 2019, all salaried white-collar
employees paid below the long test salary level were entitled to the FLSA's
protections, regardless of the duties they performed. This was true from 1938 to
1949 under the salary level test that became the long test; [198] from 1949 to
2004 under the long test; and from 2004 to 2019 under the standard salary level
test that was set equivalent to the long test level—a key fact that commenters
that opposed the Department's proposal generally did not address. Setting the
salary level below the long test level as was done in the 2019 rule—because the
2004 methodology no longer matched the long test salary level based on
contemporaneous data—departed from this history by enlarging the exemption to
newly include employees who earned less than the long test salary level. As an
initial step, the new salary level methodology must fully restore the salary
level's screening function by ensuring that employees who were nonexempt because
they earned less than the long test or long test-equivalent salary level are
also nonexempt under the standard test. Achieving this objective requires a
standard salary level amount at least equal to the long test level ($942 per
week using current data, which equates to approximately the 25th percentile of
full-time salaried worker earnings in the South).

As discussed in section V.B.5.iii, fully restoring the salary level's screening
function would affect 1.8 million employees. These are currently exempt
employees who earn between $684 (the current salary level) and $942 per week
(the long test level calculated using current data) and would become nonexempt
absent intervening action by their employers. In every rule prior to 2019,
employees who earned below the long test or long-test equivalent salary level
have always been excluded from the exemption based on their salary alone—even if
they passed the standard duties test or (prior to 2004) the more rigorous long
duties test. The Department's approach does not, as commenters asserted, create
an impermissible “de facto” salary-only test or make nonexempt too many
employees who pass the duties test, and is compatible with the district court
decision's emphasis on the salary level test's historic screening function.[199]

III. ACCOUNTING FOR THE SHIFT TO A ONE-TEST SYSTEM

In addition to fully restoring the salary level test's screening function, the
Department's proposed salary level methodology also accounted for the shift from
a two-test to a one-test system for determining who is employed in a bona fide
executive, administrative, or professional capacity. Commenters that supported
the proposed salary level and specifically addressed this rationale agreed with
it. A group of Administrative Law Professors stated that the Department's move
to a one-test system in 2004 “significantly expanded the number of relatively
low-income Start Printed Page 32870 workers who might fall within the exemption
. . . despite engaging in substantial nonexempt work[,]” and concluded that the
Department's proposal was “reasonably geared” to restoring nonexempt status to
this class of workers. The Coalition of State AGs similarly stated that the
proposal “does more to take into account the shift to a one-test system in 2004
and establishes more of a middle ground between . . . the previous short- and
long-test methodologies.” They elaborated that “the balance struck is a more
appropriate one” because most salaried white-collar employees paid less than the
proposed standard salary level do not meet the duties test, whereas a
substantial majority of salaried white-collar employees earning above the
proposed standard salary level meet the duties test. Some commenters asserted
that this aspect of the Department's rationale supported setting a salary level
higher than proposed. For example, AFL-CIO stated that the proposed salary level
captures only “a portion of workers who have been wrongly excluded from
nonexempt status since the 2004 elimination of the long and short test in favor
of a single test,” and Sanford Heisler Sharp stated that the proposal “does not
go far enough towards meeting [the] goal” of “`ensur[ing] that fewer
white-collar employees who perform significant amounts of nonexempt work and
earn between the long and short test salary levels are included in the
exemption.’ ” [200] NELA similarly urged the Department to adopt its 2016
methodology to more fully account for the shift to a one-test system.

Employer commenters that directly addressed the shift to a one-test system
generally rejected the premise that any adjustment for this change was warranted
or appropriate. Some commenters emphasized that the long test's limit on
nonexempt work became inoperative in 1991 and/or that the Department fully
accounted for the move to the standard duties test in its 2004 rule. See
Bellevue University; Chamber; NAM; RILA. The National Association of Convenience
Stores, which likewise emphasized that the short and long tests have not existed
since 2004, stated that to “the extent the two-test system still has any limited
relevancy to the current inquiry, it is that the salary level should be closer
to what the pre-2004 long test would have produced” rather than “to what the
pre-2004 `short' test would have produced” today. AFPI asserted that “[a]ny
salary level that excludes employees who are not `obviously nonexempt' is
invalid[,]” that the long test salary level is a “made-up concept[,]” and that
the “ `long test' and the `short test' are terms [that have not been] considered
since the Department's regulatory changes in 2004 . . . [and] should have no
place in determining an appropriate increase to the minimum salary level for
exemption today.” [201]

The Department agrees with commenters that supported the NPRM's objective of
updating the salary level in part to account for the move to a one-test system.
As previously explained in detail in the NPRM and in section V.B.3 of this
preamble, the Department traditionally considered employees earning between the
long and short test salary levels to be employed in a bona fide EAP capacity
only if they were not performing substantial amounts of nonexempt work. With the
adoption of a duties test based on the less rigorous short duties test, the
shift to a single-test system significantly decreased the examination of the
amount of nonexempt work employees performed. Following this shift, the
Department has taken two approaches to setting the salary level to pair with the
standard duties test. The approach taken in the 2004 rule permitted the
exemption of all employees earning above the long test salary level who met the
standard duties test—including many employees who performed substantial amounts
of nonexempt work and traditionally were protected by the long duties test. The
approach taken in the 2016 rule was challenged and criticized as making
employees earning between the long test salary level and the low end of the
short test salary range nonexempt—including employees who performed very little
nonexempt work and would have been exempt under the long duties test.

The Department recognizes that a single-test system cannot fully replicate both
the two-test system's heightened protection for employees performing substantial
amounts of nonexempt work and its increased efficiency for determining exemption
status for employees who are highly likely to perform EAP duties. Inevitably,
any attempt to pair a single salary level with the current duties test will
result in some employees who perform substantial amounts of nonexempt work being
exempt, and some employees who perform almost exclusively exempt work being
nonexempt.[202] But such a result is inherent in setting any salary level. The
Department continues to believe that it can better identify which employees are
employed in a bona fide EAP capacity by, in combination with the current duties
test, using a salary level methodology that accounts for the shift to a one-test
system, and that doing so will both restore overtime eligibility for many
individuals who perform substantial amounts of nonexempt work and historically
would have been protected by the long duties test, and address potential
concerns that the salary level test should not be determinative of exemption
status for too many individuals. Such a salary level will also more reasonably
distribute between employees and their employers what the Department now
understands to be the impact of the shift to a one-test system on employees
earning between the long and short test salary levels.

The Department disagrees with commenters that disputed this aspect of the NPRM
based on their view that the only valid salary level function is to screen from
exemption obviously nonexempt employees. Section 13(a)(1)'s broad grant of
statutory authority for the Department to define and delimit the EAP exemption
provides the Department a degree of latitude in determining an appropriate
salary level for identifying individuals who are employed in a bona fide EAP
capacity. As discussed in section V.B.3, for decades, the short test salary
level did not perform a screening function, but rather was used to determine
whether the full duties test or the short-cut duties test would be applied to
determine EAP exemption status. In a one-test system, the Department can change
the duties test, the salary level, or both, to ensure that the test for
exemption appropriately distinguishes bona fide EAP employees from nonexempt
workers. As discussed at length in the NPRM,[203] while acknowledging that it
could lessen the salary level test's role by returning to a duties test that
explicitly limited the amount of nonexempt work that could be performed, the
Department ultimately declined to propose changes Start Printed Page 32871 to
the duties test in this rulemaking. Given that decision, it is appropriate for
the Department to choose to better define the EAP exemption by accounting for
the shift to a one-test system, and to select a salary level methodology that
excludes from exemption some employees who historically were nonexempt because
of the more rigorous long duties test. The 2004 and 2019 rules' significant
broadening of the statutory exemption (a fact employer commenters generally did
not address) to permit all salaried employees earning between the long and short
tests who passed the standard duties test to be exempt was not unlawful, but it
leaves room for refinement. Section 13(a)(1) does not require the Department to
forever maintain the regulatory choice it made 20 years ago to pair the current
duties test with a salary level that places the entire burden of the move to a
one-test system on employees who historically were entitled to the FLSA's
overtime protection because they performed substantial amounts of nonexempt work
and earned between the long and short test salary levels.

The Department continues to believe that the long and short tests provide useful
parameters for determining the new salary level test methodology in this
rulemaking. The Department disagrees with AFPI that variations in the long test
methodology render it a “made-up concept” or that the long and short tests have
“no place” in determining the new salary level. The long test salary level has
played a crucial role in defining the EAP exemption for the better part of a
century, either directly under the two-test system or indirectly under the
one-test system. As the Department explained in detail in its 2004 rule, the
long test salary level “regulatory history reveals a common methodology used,
with some variations, to determine appropriate salary levels[,]” and (with the
exception of the 1975 rule) beginning in 1958 “the Department set the [long
test] salary levels to exclude approximately the lowest-paid 10 percent of
exempt salaried employees” in low-wage areas and industries.[204] The Department
“[u]se[d] this regulatory history as guidance” in its 2003 NPRM and, most
importantly, validated its chosen methodology in the 2004 rule by showing that
it produced the same salary level as the long test methodology—a critical fact
employer representatives generally did not address in their comments.[205] While
the Department agrees with AFPI and the Oxford Economics report that the data
set used to set the long test salary level was not exactly the same in each
regulatory update, just as in 2004, minor historical variations do not deprive
the long test of its usefulness in helping determine an appropriate salary level
now. The Oxford Economics report's suggestion to calculate the long test by
updating the 1975 long test salary level for inflation would not faithfully
replicate the long test because it would produce a salary level below the 10th
percentile of exempt workers in low-wage regions and industries and would
conflict with the Department's historical practice of avoiding the use of
inflation indicators in updating the salary level.[206]

The Department also disagrees with commenters who asserted that no adjustment is
needed to account for the shift to a one-test system because the long test
became largely dormant in 1991. In the 2004 rule, the Department acknowledged
this dormancy resulting from its outdated salary levels and asserted that
employees who were then subject to the long test would be better protected under
the higher salary level of the new standard test.[207] But as previously
explained, section V.B.3, in the 2004 rule the Department did not compare the
overtime protection lower-salaried employees would receive under the standard
test with the protection they would have received had the Department updated the
long test with a salary level based on contemporaneous data and kept the
existing long duties test. Instead, the Department's discussion of the
elimination of the long duties test in the 2004 rule focused primarily on the
minimal role played by the long test at that time due to the erosion of the long
salary level, and on the difficulties employers would face if they were again
required to track time spent on nonexempt work when the dormancy of the long
duties test meant that they had generally not been performing such tracking for
many years.[208]

The Department also disagrees with commenters that asserted that the 2004 rule
fully accounted for the move to the standard duties test. Because the 2004 rule
did not fully account for the lessened overtime protection for employees who
would have been nonexempt under an updated long test (as just described), it
created a group of employees with lessened protection under the standard
test—those who earned between the long and short test salary levels. These
employees were traditionally nonexempt because they failed the long duties test,
but were exempt under the 2004 rule because they passed the more lenient
standard duties test.[209] By setting the standard salary level equivalent to
the long test salary, the 2004 rule in effect created a group of employees who
bore the impact of the change from the two-test to the one-test system.

IV. SELECTING THE SALARY LEVEL METHODOLOGY

In its NPRM, the Department explained that fully restoring the salary level's
screening function and accounting for the move to a one-test system supported
setting the salary level at the 35th percentile of full-time salaried worker
earnings in the lowest-wage Census Region (the South)—resulting in a proposed
salary level of $1,059 per week. Commenters provided competing views on this
proposed increase. Employers and employer representatives that opposed the
proposed salary level often characterized it as “too much, too soon”—stating
that an increase of 54.8 percent (or 69.3 percent, based on the $60,209
projected salary level figure included in footnote 3 of the NPRM) [210] less
than 4 years after the most recent increase was unnecessary and unprecedented.
See, e.g., Air Conditioning Contractors of America; Americans for Prosperity;
Joint Comment from Argentum and American Seniors Housing Association; CUPA-HR;
International Sign Association; NRF. Some commenters, including American
Association of Community Colleges and Associated Builders and Contractors,
observed that, by contrast, prior salary level updates have ranged from 5 to 50
percent, and others commented that the proposed increase greatly exceeded the
rate of inflation since the 2019 rule, see Independent Community Bankers of
America, Ohio Start Printed Page 32872 Township Association. Many employer
organizations asserted that the Department was trying to resurrect a methodology
akin to the invalidated 2016 rule and that, like that rule, the proposed salary
level (which many stressed is a higher dollar figure than the level set in the
2016 rule) would unlawfully supplant the duties test. See, e.g., Americans for
Prosperity; National Restaurant Association; PPWO.

Commenters that opposed the proposed salary level were particularly concerned
about the impact of this change on specific industries and on businesses in
low-wage regions. Some commenters, such as the American Outdoors Association,
CUPA-HR, NAHB, and SHRM, provided information from internal surveys to support
how the proposal would negatively affect their members. SBA Advocacy similarly
summarized concerns received from small businesses. See also, e.g., NFIB. Some
commenters emphasized the proposal's impact on particular occupations in their
industries, including first-line supervisors, see, e.g., AHLA, NAHB, and
entry-level managers, see, e.g., NAM, NRF. Emphasizing the proposed salary
level's geographic impact, National Restaurant Association and PPWO warned that
the proposal would exclude from exemption a high percentage of employees who
pass the duties test in lower-wage regions, and could result in employees in the
same job classification being treated differently based on where they live. A
number of educational institutions opposed the proposed increase due to
cost-related concerns specific to the educational sector. See, e.g., American
Association of Community Colleges; Association of Independent Colleges and
Universities of Ohio; National Association of Independent Colleges and
Universities. The National Association of Counties raised similar concerns about
the impact of the increased salary level on local governments. Nonprofit sector
feedback was more mixed, with the National Council of Nonprofits characterizing
the industry response as one of “moral support” and “operational anxiety.” Some
nonprofit organizations opposed the proposal, see, e.g., Children's Alliance of
Kentucky, U.S. Public Interest Research Group (U.S. PIRG), some supported it,
see, e.g., CLASP, Justice at Work, and some agreed with the Department's intent
but raised cost and other concerns, see, e.g., Catholic Charities, Open Roads
Bike Program.

Commenters had different suggestions for how the Department should account for
such regional and industry-specific differences. For example, RILA urged the
Department to include the retail industry in its data set, AFPI suggested
setting the salary level equal to the 20th percentile of non-hourly employee
earnings in the ten lowest-wage states, and Seyfarth Shaw recommended using the
East South Central Census Division. The Chamber asked the Department to focus on
data from the lowest-wage types of entities (such as small businesses, small
nonprofits or small public employers), in the lowest-wage industries, in rural
areas, in the lowest-wage Census Region. The Chamber and National Association of
Convenience Stores favored excluding nonexempt workers from the data set (and
using a lower earnings percentile) and questioned the Department's use of
Current Population Survey (CPS) Merged Outgoing Rotation Group (MORG) data for
nonhourly earnings for full-time workers as a proxy for salaried worker
earnings.

Commenters that supported increasing the salary level viewed the Department's
proposal very differently than employer representatives. Whereas many employer
representatives focused on specific regions or industries to assert that the
proposed salary level was too high, supportive commenters focused on the
national impact to assert that the salary level was appropriate or too low. Many
supportive commenters considered it “modest.” See, e.g., AFSCME; CLASP; Family
Caregiving Coalition; National Partnership. Others stated that the salary level
“could have reasonably been significantly higher and still within historical
precedent.” See, e.g., Common Good Iowa; Jobs to Move America; Louisiana Budget
Project; Maine Center for Economic Policy; North Carolina Justice Center. The
statistic most often cited to support that the proposal was conservative by
historical standards was that whereas 62.8 percent of full-time salaried workers
earned less than the short test salary level in 1975, 28.2 percent of full-time
salaried workers earned less than the proposed standard salary level (and
several of these commenters noted that only approximately 9 percent earned less
than the current salary level). See, e.g., EPI; National Center for Law and
Economic Justice; Worker Justice Center of New York; Workplace Justice Project.
AFL-CIO and others highlighted that the proposed salary level was 19 percent
lower than the inflation-adjusted value of the 1975 short test salary level, and
EPI stated that, on average, the proposed salary level was 16 percent lower than
inflation-adjusted short test salary levels set from 1949 and 1975. Some
supportive commenters stressed that a significant salary level increase was
needed in part to account for the 2004 rule's elimination of the long duties
test, see, e.g., EPI, NELP, while NWLC stated that the proposed methodology
would “not eclipse the role of the duties test” and instead would “restore[] a
reasonable balance between the strength of the duties test and the height of the
salary threshold.”

Some commenters advocated for a much higher salary level than the Department
proposed, and a number of commenters specifically proposed alternate
methodologies for the Department to adopt in the final rule. For example, NELA
stated that the proposed level was “too low from a historical perspective” and,
favoring “[b]older federal action[,]” asked the Department to (like in the 2016
rule) set the salary level equal to the 40th percentile of weekly earnings of
full-time salaried workers in the lowest-wage Census Region (which would produce
a salary level of $1,196 per week based on the data used in this final rule).
Winebrake & Santillo similarly favored a return to that methodology. AFL-CIO
supported setting the salary level higher—at the historical average short test
salary level (which would result in a salary level of $1,404 per week based on
current data). Other commenters sought a salary level that they stated would
exclude from exemption the same proportion of full-time salaried workers as
under the 1975 salary level test. For example, Demos urged the Department to set
the salary level at the 55th percentile of weekly earnings of full-time salaried
workers nationwide to meet this “high-water” mark, and Nick Hanauer supported a
salary level of at least $83,000 to “restore the overtime threshold” to a time
“when the American middle class was strongest[.]” Commenters that sought a
higher salary level than the Department proposed often expressed their
disagreement with the district court's decision invalidating the 2016 rule. See,
e.g., NELA; Sanford Heisler Sharp; Winebrake & Santillo.

After considering the comments received, the Department is finalizing the salary
level methodology as proposed, setting it equal to the 35th percentile of
full-time salaried worker earnings in the lowest-wage Census Region (the
South)—which produces a salary level of $1,128 per week using calendar year 2023
data. Consistent with the Department's responsibility to “not only . . .
determin[e] which employees are entitled to the exemption, but also [to] draw[]
the line beyond which the Start Printed Page 32873 exemption is not
applicable[,]” [211] this salary level will, in combination with the standard
duties test, effectively calibrate the scope of the exemption for bona fide EAP
employees and do so in a way that distributes across the population of
white-collar employees earning between the long and short test salary levels the
impact of the shift to a one-test system. As previously discussed, updating the
salary level for wage growth since the 2019 rule produces a salary level of $844
per week, and fully restoring the salary level's historic screening function
would result in a salary level of $942 per week, equivalent to the 25th
percentile of full-time salaried worker earning in the South ( i.e., the long
test level). Accordingly, the increase from the 25th percentile to the 35th
percentile is to account for the shift to a one-test system.[212] The Department
set the standard salary level at (or below) the long test level in the 2004 and
2019 rules and set it at the low end of the historic range of short test salary
levels in the 2016 rule. Setting the salary level at either the long test salary
level or equivalent to a short test salary level in a one-test system with the
standard duties test, however, results in either denying overtime protection to
lower-paid employees who are performing large amounts of nonexempt work, and
thus, would have been exempt under the Department's historical view of the EAP
exemption, or in raising concerns that the salary level is determining the
exemption status of too many employees. In contrast, an appropriately calibrated
salary level between the long and short test salary levels better defines and
delimits which employees are employed in a bona fide EAP capacity, and thus
better fulfills the Department's duty to define and delimit the EAP exemption.

The Department's methodology established in this final rule uses the
second-to-lowest of the earnings ventiles between the long test salary level
(the 25th percentile of full-time salaried worker earnings in the lowest-wage
Census Region) and the short test salary level (approximately the 51stth
percentile of this data set). These ventiles are the 30th, 35th, 40th, 45th, and
50th percentiles of full-time salaried worker earnings in the lowest-wage Census
Region. The Department continues to believe that its methodology produces a
salary level high enough above the long test salary level to ensure overtime
protection for some lower-paid employees who were traditionally entitled to
overtime compensation under the two-test system by virtue of their performing
large amounts of nonexempt work, and also low enough, as compared with higher
salary levels, to significantly shrink the group of employees performing EAP
duties who are excluded from the exemption by virtue of their salary alone.
Whereas the 2004 and 2019 rules permitted the exemption of employees earning
between the long and short test salary levels even if they performed significant
amounts of nonexempt work, and the 2016 rule prevented employers from using the
exemption for such employees earning below the short test salary range even if
they performed EAP duties, the methodology adopted in this final rule falls
between these two methodologies and thus, as commenters including the
Administrative Law Professors and Coalition of State AGs agreed, reasonably
balances the effect of the switch to a one-test system in a way that better
differentiates between those who are and are not employed in a bona fide EAP
capacity. Of the 10.8 million salaried white-collar employees earning between
the equivalent of the long and short test salary levels, approximately 40
percent earn between $942 (the equivalent of the long test salary level) and
$1,128 (the new salary level) and would receive overtime protection by virtue of
their salary, while approximately 60 percent earn between $1,128 and $1,404 (the
equivalent of the short test salary level) and would have their exemption status
turn on whether they meet the duties test. These and other statistics, discussed
in section V.B.5.iii, demonstrate that the salary level will not “essentially
eliminate[ ] the role of the duties test” as National Restaurant Association and
others contended. See also, e.g., AHLA; CWC.

Even though the Department's decision to select a salary level below the
midpoint between the long and short tests means that the effect of the salary
level on employees earning within this range and their employers is not exactly
equal, a higher salary level could disrupt the reliance interests of employers
who (due in part to the Department's failure to update the salary level tests
between 1975 and 2004), have been able to use a lower salary level and more
lenient duties test to determine exemption status since 1991. However, a
significantly lower salary level akin to the long test salary level would avoid
disrupting such reliance interests only by continuing to place the burden of the
move to a one-test system entirely on employees who historically were entitled
to the FLSA's overtime protections because they perform substantial amounts of
nonexempt work. The Department believes that employer reliance interests should
inform where the salary level is set between the long and short test levels, and
that its approach appropriately balances the impact of the move to a one-test
system between employees' right to receive overtime compensation and employers'
ability to use the exemption. Such balancing is fully in line with the
Department's authority under the FLSA to “mak[e] certain by specific definition
and delimitation” the “general phrases” “bona fide executive, administrative, or
professional capacity.” [213] This grant of authority confers discretion upon
the Department to determine the boundaries of these general categories; any such
line-drawing, as courts have recognized, will “necessarily” leave out some
employees “who might fall within” these categories.[214]

The Department recognizes the tension between the methodology adopted in this
final rule and some statements made in its 2016 and 2019 rules. The Department
stated in its 2016 rule that the current duties test could not be effectively
paired with a salary level below the short test salary range, and for this
reason expressly rejected setting the salary level at the 35th percentile of
weekly earnings of full-time salaried workers in the South.[215] But that rule,
which would have prevented employers from using the EAP exemption for some
employees who were considered exempt under the prior two-test system, was
challenged in court, and a return to it would result in significant legal
uncertainty for both workers and the regulated community. In the 2019 rule, the
Department expressly rejected setting the salary level equal to the long test or
higher.[216] However, as noted above, the Department did not fully address in
that rule the implications of the switch from a two-test to a single-test
system. Having now grappled with those implications, the Department concludes
that not only can it pair the current duties test with a salary between the long
and short test salary levels, but that doing so Start Printed Page 32874
appropriately recalibrates the salary level in a one-test system to ensure that
it effectively identifies bona fide EAP employees.

In setting the salary level, the Department continues to believe that it is
important to use a methodology that is transparent and easily understood. As in
its prior rulemakings, the Department is setting the salary level using earnings
data from a lower-salary regional data set (as opposed to nationwide data) to
accommodate businesses for which salaries generally are lower due to geographic
or industry-specific reasons.[217] Specifically, the Department is setting the
salary level using the data set of full-time nonhourly [218] workers in the
lowest-wage Census Region (the South). This approach promotes transparency
because BLS routinely compiles this data. It also promotes regulatory
simplification because the data set is not limited to exempt EAP employees and
thus does not require the Department to model which employees pass the duties
test.[219] In keeping with the Department's past practice, it is relying on
up-to-date data to determine the salary level.[220] In the NPRM, the Department
used 2022 salary data for estimating the salary level resulting from the
proposed methodology, which was current at the time the Department developed its
proposal. In this final rule, the Department is relying on calendar year 2023
salary data, as published by BLS, to set the salary level.[221]

Given the strong views expressed by commenters, including those opposing the
proposal or favoring a higher salary level, the Department did not arrive
lightly at its decision to finalize the salary level methodology as proposed.
Commenter feedback often reflected competing vantage points for assessing the
Department's proposal. Commenters that supported the Department's proposal or a
higher salary level (most often, the 2016 rule methodology) often compared the
proposed salary to short test salary levels, while commenters that opposed the
proposed increase often stressed the size of the change from the current salary
level. The Department agrees with supportive commenters that past salary levels
should inform the current update, and agrees that statistics such as the
percentage of salaried white-collar workers who earn below the salary level or
statistics comparing the new salary level to inflation-adjusted prior levels,
reinforce the reasonableness of the Department's approach. However, the
Department is wary of comments urging a return to the 2016 rule methodology that
do not account for subsequent court decisions and the Department's 2019
rulemaking. The Department also recognizes concerns from some commenters about
the size of the salary level increase. But this metric is influenced by many
factors and thus does not, in and of itself, establish whether a salary level
sets an appropriate dividing line for determining whether an employee is
employed in a bona fide EAP capacity. For example, the size of the current
increase is influenced by factors including significant wage growth since the
2019 rule (simply adjusting the current salary level methodology for wage growth
would result in a roughly 23 percent increase); the Department for the first
time updating a salary level that was set below the long test; and the
Department adjusting the salary level to account for the move to a one-test
system. While the 65 percent increase is greater in percentage terms than most
prior updates, the Department does not consider this factor dispositive.[222]

The salary level methodology adopted in this final rule ($1,128 per week;
$58,656 annually) produces a salary level that is lower than the two salary
level estimates provided in footnote 3 of the NPRM ($59,284 and $60,209), which
were based on a quarter of data. The Department disagrees with commenters that
criticized the Department for providing projected salary level figures in its
NPRM. These comments overlook that the NPRM proposed a methodology for updating
the salary level test, not just a salary level figure. Providing commenters an
estimate of the salary level that the proposed methodology could produce in a
final rule based on updated data promoted rulemaking transparency and the
opportunity for fully informed commenter feedback. That many commenters used the
figures in footnote 3 in their comments, and the final salary level based on
calendar year 2023 data is between the proposed salary level and the two
estimates in the footnote, reinforces that footnote 3 in no way deprived
commenters of the opportunity to meaningfully comment on the NPRM.

As previously discussed, most employer commenters that opposed the proposed
salary level opposed any increase or at most supported a return to the 2004/2019
methodology, and so they did not address the NPRM's analysis examining where to
set the salary level between the long and short test salary levels. The
Department does not find these comments persuasive because they in effect sought
a salary level below the long test level, which would not even fully restore the
salary level's screening function, let alone account at all for the move to a
one-test system. As for commenter concerns about the salary level's impact on
low-wage regions and industries, the Department accounts for these concerns by
setting the salary level using the lowest-wage Census Region. This aspect of the
rulemaking differs from the 2016 rulemaking, where the Department proposed to
set the salary level using a national data set and then, in response to
commenters concerns, shifted to the lowest-wage Census Region in the final rule
to account for low-wage regions and industries.[223] The Department used this
past experience to account for the impact on low-wage regions and industries in
developing the NPRM and, having done so, is again basing the salary level on the
earnings of workers in the lowest-wage Census Region in this final rule.

The Department declines requests from some commenters to change the data set it
used to set the salary level. Some asked the Department to add earnings data
from a specific industry to the CPS earnings data. The Department is not
altering the data set in this way because it believes that using earnings data
from the lowest-wage Census Region produces a salary level that accounts for
differences across industries and regional labor markets. The Department also is
not altering the Census region data set so that it excludes all states with
higher earnings, nor is the Department creating a new data set that includes
only States with the lowest earnings. The Department's chosen approach is
consistent with its practice since the 2004 rule of using the South, rather than
a narrower geographic region, when setting the salary level. Restricting the
data set to the ten lowest-wage states or to the East South Central Region (made
up of just four states, Alabama, Kentucky, Mississippi, and Tennessee) would
give undue weight to low-wage areas and Start Printed Page 32875 skew the salary
level. The Chamber's suggestion to restrict the data set even further (by
focusing on low-wage entities within low-wage industries within rural areas
within the South) would even further compound this concern.

The purpose of the data set is not simply to produce the lowest possible salary
level. The Department's approach directly accounts for low-wage areas while
producing a salary level that is appropriate to apply nationwide. The Department
also declines requests to limit its data set to exempt workers, instead
continuing to set the salary level using earnings data for exempt and nonexempt
workers—as it has done in every one of its rulemakings under the one-test
system. As explained in the 2004 rule, the Department's chosen approach is
preferable in part because restricting the data set to exempt employees requires
“uncertain assumptions regarding which employees are actually exempt[.]” [224]
The Department is also continuing to use data on nonhourly worker earnings as a
proxy for compensation paid to salaried workers. Although some commenters
challenged this approach, the Department is not aware of, and commenters did not
provide, any statistically robust data source that more closely reflects salary
as defined in the Department's regulations. Also, as discussed in section VII,
the Department believes that relatively few nonhourly workers were paid by
methods other than salaried.

In response to commenter opposition to the proposed salary level and the
concerns described above, the Department considered setting the salary level
equal to the 30th percentile of earnings of full-time salaried workers in the
lowest-wage Census Region. The Department ultimately decided not to adopt this
approach, however, because it would less effectively account for the shift to a
one-test system. This methodology would set the salary level based on the lowest
earnings ventile between the short and long test salary levels and produce a
salary level that is only $77 above the long test level. As a result, for the
population of white-collar workers earning between the long and short tests,
only 18 percent would earn below the salary level (whereas 40 percent of this
population earn below the new salary level). This approach thus would not
sufficiently address the problem inherent in the 2004 methodology of including
in the exemption employees who perform significant amounts of nonexempt work,
including those earning salaries close to the long test salary level—where the
Department would expect a higher proportion of workers to perform more nonexempt
work.[225] In contrast, the Department's approach addresses these concerns in a
manner that more reasonably distributes among employees earning between the long
and short test salary levels and their employers the impact of the Department's
move to a one-test system.

The Department disagrees with commenters that stated that the chosen methodology
simply resurrects the 2016 methodology—which set the salary level equal to the
40th percentile of full-time salaried worker earnings in the lowest-wage Census
Region. The fact that the new salary level is higher in nominal dollars than the
level set in the 2016 rule ($913 per week) is irrelevant because that level was
calculated using 2015 data.[226] Applying the 2016 methodology to current data
produces a salary level of $1,196 per week. Whereas under this rule an
employee's salary level will be determinative of exemption status for 40 percent
of the 10.8 million employees earning between the long and short test levels,
under the 2016 methodology salary would be determinative for 55 percent of such
employees. A salary level equivalent to the 40th percentile in the South would
also result in 5.0 million affected workers. Although some of these workers earn
below the long test level and would be nonexempt under either approach, this
alternative approach would result in 949,000 more affected workers than the
Department's chosen methodology. The Department's decision to deviate from the
2016 methodology is significant, as underscored by the fact that (as discussed
in more detail below) a number of employee representatives urged the Department
to adopt that methodology or a higher percentile.

The Department recognizes that many commenters found the proposed methodology
conservative, or overly conservative, with some commenters urging the Department
to select a methodology that produces a higher salary level. Repeating the 2016
rule methodology, as some commenters requested, by setting the salary level at
the 40th percentile of weekly earnings of full-time salaried workers in the
lowest-wage Census Region would further reduce the impact of the move to a
one-test system on lower-paid white-collar employees who perform significant
amounts of nonexempt work. As discussed above, commenters that supported the
2016 rule methodology provided statistics demonstrating that this approach
yields a salary level within historical norms. The 40th percentile would produce
a salary level ($1,196 per week) that is above the midpoint between the long and
short test salary levels. As noted above, of the approximately 10.8 million
salaried white-collar employees who earn between the long and short test salary
levels, approximately 55 percent earn between the long test salary level and
$1,196 and would receive overtime protection by virtue of their salary, while
approximately 45 percent earn between $1,196 and the short test salary level and
would have their exemption status turn on whether they meet the duties test.

The Department believes this rule appropriately distributes the burden of the
change from a two-test to one-test system between employees and employers. By
contrast, the Department remains concerned that courts could find that adopting
the 2016 rule methodology would make the salary level test determinative of
overtime eligibility for too many employees. Setting the salary level equal to a
higher percentile of weekly earnings (such as the 55th percentile as Demos
recommended), would further amplify this concern. Setting the salary level based
on a lower percentile of earnings will (compared to such higher levels) increase
the number of employees for whom duties is determinative of exemption status,
and in turn increase the ability of employers to use the exemption for more
lower-paid employees who meet the EAP duties requirements. This outcome is
consistent with the important role of the duties test in identifying bona fide
EAP employees. EPI did not find the number of workers affected by a salary level
increase to be an informative metric for assessing whether a threshold is
appropriate and the Department agrees that this statistic has significant
limitations. In particular, it is notable that although the standard salary
level changes will result in 4.0 million affected workers (1.0 million from the
initial update and 3.0 million from applying the new standard salary Start
Printed Page 32876 level),[227] only 2.2 million of these workers are due to the
increase from the long test to the new methodology, while 1.8 million affected
workers (or 45 percent) are a result of restoring the historic screening
function of the long test salary level. By comparison, updating the salary level
using the 2016 methodology and current data would result in 5.0 million affected
workers. Although the number of affected workers for this rule is above the
number of affected workers in the 2019 rule, the difference is necessary to
fully restore the salary level's screening function and account for the shift to
a one-test system, and the overall impact of this change on the workforce is
relatively small ( see section V.B), such that the new salary level is a proper
exercise of the Department's authority to define and delimit the scope of the
EAP exemption.

In declining to adopt the 2016 rule methodology, the Department is also
responding to concerns that setting the salary level equal to the 40th
percentile of weekly earnings of full-time salaried workers in the lowest-wage
Census Region would foreclose employers from exempting any white-collar
employees who earn less than that amount ($1,196 per week based on the data used
in this final rule) and perform EAP duties, including those who were exempt
under the long test and remained exempt when the Department established the
one-test system in 2004 and set the salary level equivalent to the long test
level.[228] Litigants challenging the 2016 rule emphasized this consequence of
setting a salary level above the long test in a one-test system, and those
arguments have contributed to the Department more fully attempting to account
for the impact of the shift to a one-test system. Although some commenters
favored a salary level equivalent to the short test level, such an approach
would result in employers being unable to use the exemption for any employees
who earn between the long and short test and have previously been exempt, either
under the long test, or under the standard test set equal to the long test. In
contrast, the methodology in this final rule produces a salary level that is not
only below any short test level, but also lower than the midpoint between the
long and short test salary levels. This approach appropriately balances the goal
of ensuring that employees earning above the long test salary level who perform
substantial amounts of nonexempt work are not exempt with the goal of enabling
employers to use the exemption for employees who do not perform substantial
amounts of nonexempt work.

V. SALARY LEVEL EFFECTS

In selecting the salary level methodology, the Department also considered
commenter views that the proposed salary level would generate a range of
repercussions. Many commenters that opposed the proposed salary level stated
that it would cause widespread reclassification of currently exempt employees to
nonexempt status and a corresponding decrease in flexible work arrangements,
including remote work opportunities. See, e.g., FMI; IFDA; National Lumber and
Building Material Dealers Association; NRF. Others stated that employers would
convert newly nonexempt employees from salaried to hourly status, which they
contended would harm employee morale, see, e.g., Independent Electrical
Contractors, National Small Business Association, and create an undesirable
“punch the clock” mentality, see, e.g., North Carolina Center for Nonprofits,
The 4A's. Some commenters that opposed the proposal stated that the rule would
“harm the very workers the Department says it is trying to benefit,” asserting,
for example, that the proposal would result in reduced employee benefits and
career advancement opportunities, and increased turnover. See Americans for
Prosperity; see also PPWO. Other commenters expressed concern that the proposed
increase would decrease employee productivity, see, e.g., John. C. Campbell Folk
School, decrease social services, see, e.g., Social Current, increase employer
costs, prices, and inflation, see, e.g., Chamber, and/or cause salary
compression issues, see, e.g., Seyfarth Shaw.

Commenters that supported the Department's proposed salary level or a higher
salary level than proposed often highlighted what they viewed as positive
effects of the proposed increase. Many emphasized that the updated salary level
would make it more difficult to exempt lower-paid employees who they believed
should be nonexempt, particularly low-level managers with many duties equivalent
to non-managerial employees. See, e.g., Coalition of Gender Justice and Civil
Rights Organizations; NELP; Winebrake & Santillo. Restaurant Opportunities
Center United stated that the current “low salary threshold discourages
restaurant employees from taking managerial and supervisory positions, thereby
gaining skills and experience that would enable them to advance their
careers[.]” Sanford Heisler Sharp stated that the “need for monitoring and
protecting white-collar workers' hours is critical today” because the
significant increase in telework since 2020 has meant that employers are “no
longer constrained by the practical limitation of the worker leaving the
workplace.” Other employee representatives explained that the rule would produce
positive societal benefits such as increased economic security, see, e.g., NELP,
improved worker health due to decreased work hours, see, e.g., SEIU, decreased
poverty, see, e.g., NEA, and disproportionate benefits for women, people of
color, and workers with disabilities, see, e.g., National Partnership.

Taken together, the above comments do not provide a compelling justification for
deviating from the Department's proposed salary level methodology. The
Department agrees that the salary level increase will result in some currently
exempt employees becoming nonexempt and therefore receiving minimum wage and
overtime protections. Employee reclassification is a consequence of any salary
level increase, and the number of reclassified employees will depend on how
employers choose to respond to this rule for their employees who earn between
the current and new salary levels. Moreover, there is no prohibition on paying
nonexempt employees a salary as long as any overtime hours are appropriately
compensated, and employers may therefore choose to continue to pay a salary to
affected workers. Employers likewise have latitude to determine what flexible
work arrangements to provide employees and, more broadly, need not structure
their pay plans in a manner that results in the potentially adverse effects
(such as decreased employee benefits) that some employers identified.
Significantly, employees and employee representatives did not share employer
commenter concerns about potential adverse consequences of the proposed salary
level, let alone view them as a justification for deviating from the proposed
salary level. This includes comments from individual employees. For example, an
exempt manager for a small nonprofit organization stated that they “would love
the opportunity to be reclassified to nonexempt and be compensated for time
worked beyond 40 hours, or alternatively be given a raise if that level of
flexibility is deemed necessary by my employer.” As to potential consequences of
the updated salary level on the economy more broadly, such implications are
speculative and in dispute (as discussed Start Printed Page 32877 in some detail
in section VII), and do not provide a basis for a different salary level
methodology.

IV. OTHER ISSUES

The Department also addresses some other issues stakeholders raised in their
comments.

Many nonprofit organizations worried that the proposed salary level would
disproportionately affect them, raising concerns related to, for example, their
reliance on government grants, see, e.g., Asclepius Initiative, Catholic
Charities, National Council of Nonprofits, and their inability to raise prices,
see, e.g., Advancing States, Independent Sector, YMCA. Some commenters asked the
Department to exempt at least certain nonprofit organizations from the salary
level test. See, e.g., Oklahoma Wesleyan University; U.S. PIRG. Many nonprofit
organization commenters opposed this idea. See, e.g., A Second Chance; Delaware
Alliance for Nonprofit Advancement; National Council for Nonprofits; North
Carolina Center for Nonprofits. The Department recognizes and values the
enormous contributions that nonprofit organizations make to the country.
Nonprofit organizations provide services and programs that benefit many
vulnerable individuals in a variety of facets of life, including services that
benefit the vulnerable workers who the Department also works to protect by
ensuring that their workplaces are fair, safe, and secure. However, the
Department's EAP exemption regulations have never had special rules for
nonprofit organizations; the employees of nonprofits have been subject to the
EAP exemption if they satisfied the same salary level, salary basis, and duties
tests as other employees.[229] Consistent with this history, the Department
declines to exempt nonprofit organizations from the salary level test. As with
other industries, as discussed above, the Department accounts for nonprofit
industry concerns by setting the salary level using the lowest-wage Census
Region.

A number of community-based service providers for people with intellectual and
developmental disabilities urged the Department to work closely with other
government agencies, including the Centers for Medicare and Medicaid Services
(CMS) and the Administration for Community Living (ACL), to implement the
Department's proposed changes in the context of Medicaid home and
community-based services (HCBS). See, e.g., ANCOR; BrightSpring Health Services;
NASDDDS; United Cerebral Palsy Association. Some commenters specifically
referenced a policy that was adopted by the Department related to the
enforcement of the 2016 regulation for providers of Medicaid-funded services for
individual with intellectual or developmental disabilities in residential homes
or facilities with 15 or fewer beds. 230 See, e.g., Chimes; The Arc of the
United States. Consistent with its approach in the 2019 rule, the Department is
not adopting a similar policy in this rulemaking. The Department believes
following this approach is appropriate given that the initial update (to $844
per week) is less than salary level increase in the 2019 rule, and service
providers will have approximately 8 months from publication of this rule to
comply with the new salary level ($1,128 per week). Additionally, the Department
intends (as many commenters requested) to issue technical assistance to help
employers comply with the FLSA and will continue to coordinate (as other
commenters requested) with ACL and CMS on supporting Medicaid-funded service
providers impacted by this rule.

Some commenters asked the Department to permit employers to prorate the salary
level for part-time employees. See, e.g., NCFC; PPWO; Seyfarth Shaw; University
System of Maryland. The Department has never prorated the salary level for
part-time positions; considered and rejected similar requests in its 2004, 2016,
and 2019 rules; and declines to establish a prorated salary level for part-time
positions in this rule.[231] As the Department has previously explained,
employees hired to work part time generally do not work in excess of 40 hours in
a workweek, and overtime pay is not at issue for these employees. An employer
may pay a nonexempt employee a salary to work part time without violating the
FLSA, so long as the salary equals at least the minimum wage when divided by the
actual number of hours (40 or fewer) the employee worked.[232]

The Chamber objected to the Department's proposed change to the example provided
in § 541.604(b), a salary basis test regulation establishing that an exempt
employee may be paid on an hourly, daily, or shift basis if the employment
arrangement “includes a guarantee of at least the minimum weekly required amount
paid on a salary basis regardless of the number of hours, days or shifts worked,
and a reasonable relationship exists between the guaranteed amount and the
amount actually earned.” The Department did not propose any substantive change
to this regulation and only proposed to update the dollar amounts in light of
the proposed increase in the standard salary level. The Department has again
updated the figures in the regulation to account for the salary level change
from the NPRM to the final rule. The updated numbers in this final rule produce
the same ratios between actual and guaranteed earnings as example in the current
regulations. The Department declines the Chamber's suggestion to change the
numbers, which would change the ratio.

Some commenters urged the Department to increase the percentage of the salary
level that employers could satisfy using nondiscretionary bonuses and incentive
payments (including commissions). See, e.g., FMI; National Automobile Dealers
Association; National Golf Course Owners Association; TechServe Alliance. The
Department did not propose any changes to how bonuses are counted toward the
salary level requirement,[233] and declines to make any such changes in this
final rule. Consistent with the current regulations, employers can satisfy up to
10 percent of the new salary level ($112.80 per week under this final rule)
through the payment of nondiscretionary bonuses and incentive payments
(including commissions) paid annually or more frequently.

5. ASSESSING THE IMPACT OF THE SALARY LEVEL

I. THE DEPARTMENT'S ASSESSMENT OF THE IMPACT OF THE PROPOSED SALARY LEVEL

As stated in the NPRM, the Department sought to achieve three objectives in
proposing to set the standard salary level at the 35th percentile of weekly
earnings of full-time salaried workers in the lowest-wage Census Region:
preserve the primary role that the duties test plays in determining EAP
exemption status; fully restore the initial screening function of the salary
level; and more effectively identify in a one-test system who is employed in a
bona fide EAP capacity in a manner that reasonably distributes among employees
earning between the long and short test salary levels and their employers the
impact of the Department's move from a two-test to a one-test system.

In assessing whether the proposal met these objectives, the Department first
considered the impact of its proposed Start Printed Page 32878 salary level on
salaried white-collar workers across the income spectrum. The Department noted
that almost three-quarters of salaried white-collar workers earned above the
proposed salary level, and therefore duties, rather than salary, would remain
determinative of exemption status for a significant majority of white-collar
workers. The Department also concluded that a minority of the smaller share of
salaried white-collar workers who earn less than the proposed standard salary
level would meet the duties test, whereas approximately three-quarters of the
far-larger share of salaried white-collar workers who earn at least the proposed
standard salary level would meet the duties test. The Department noted that this
supported that the proposed salary level would be an effective indicator of the
capacity in which salaried white-collar workers are employed. The Department
also examined the impact of the proposed salary level on currently exempt EAP
workers—salaried white-collar employees who meet the standard duties test and
earn at least $684 per week. The Department found that 1.8 million of the
workers who would be affected by the proposed salary level earned less than the
long test salary level and therefore would have been screened from the exemption
under every prior rule issued by the Department except for the 2019 rule, thus
confirming that the proposed standard salary level would play a relatively
modest role in determining EAP exemption status.

II. COMMENTS RECEIVED

The Department received relatively few comments directly addressing its
estimates of the impact of the proposed salary level or the metrics it
identified to assess those impacts. As previously discussed, some commenters
representing employer interests stated that the proposal would exclude too many
workers from the exemption based on their earnings. See, e.g., Chamber; PPWO;
Seyfarth Shaw. However, commenters that expressed such views generally did not
challenge the Department's analysis of the impact of its proposed salary level
on all salaried white-collar workers,[234] nor did they generally address the
Department's conclusion that under the proposed standard salary level, duties
would be determinative of exemption status for a large majority of full-time
salaried white-collar workers.[235] As noted in section V.B, employer advocates
that opposed the Department's proposed salary level instead often emphasized the
salary level's function of screening obviously nonexempt employees from the
exemption, albeit asserting that the proposed salary level would exceed its
screening function, see, e.g., PPWO, RILA, SHRM, whereas worker advocates often
favored a greater role for the salary level than employer representatives, see,
e.g., AFSCME, EPI, Family Values @Work.

AFPI challenged the Department's estimate of the number of workers who earn
between the proposed salary level and the long test salary level, which it
claimed is a “made-up number.” [236] Some commenters representing employer
interests stated that the Department underestimated the number of currently
exempt workers who would be impacted by its proposed salary level. See, e.g.,
AFPI; NAM; NRF (including a report by Oxford Economics); Rachel Greszler;
Seyfarth Shaw. The Oxford Economics report claimed that up to 7.2 million
workers could be affected by the proposed salary level; AFPI asserted that
approximately “7.5 million employees would be non-exempt for the first time
based on salary alone”; and Rachel Greszler stated that the correct figure is as
high as 12.3 million workers. NAM stated that the Department “underestimated the
impact,” though it did not elaborate. Some of these commenters also challenged
the probability codes the Department used to estimate the number of workers who
meet the duties test. See, e.g., AFPI; Rachel Greszler.

On the other hand, AFL-CIO, the Coalition of State AGs, and EPI relied on the
Department's estimates in their comments. For instance, the Coalition of State
AGs observed that “ `most salaried white-collar employees paid less than the
proposed standard salary level do not meet the duties test, whereas a
substantial majority of salaried white-collar employees earning above the
proposed standard salary level meet the duties test,' ” quoting the NPRM, in
opining that the proposed salary level struck a more appropriate balance between
the long and short test salary levels than the 2004 and 2019 rules. In asserting
that the proposed salary level, although “too low[,]” would restore overtime
protections to lower-paid workers “who were wrongly classified as exempt[,]”
AFL-CIO referenced the Department's estimate that the proposed salary level
would be “restorative for more than half of the workers it affects” since “these
employees would have been entitled to overtime in every rule prior to the 2019
rule.” EPI noted that the 3.4 million workers that the Department estimated
would be affected by the proposed salary level, plus the approximately 248,000
workers who would be affected by the proposed change in the total compensation
threshold for the HCE test, discussed below, together constituted “just 2.6% of
workers subject to [the] FLSA . . . and just 2.3% of all workers.” As discussed
in section V.B, numerous commenters representing workers also pointed to
additional data points which, they stated, show that the Department's proposed
salary level would fulfill a relatively limited role in determining exemption
status, particularly by historical standards. For instance, multiple commenters
stated that approximately 28.2 percent of all full-time salaried workers earn
below the proposed salary level, whereas in 1975 approximately 62.8 percent of
full-time salaried workers earned below the short test salary level. See, e.g.,
AFL-CIO; EPI; NELP; NWLC.

III. ASSESSING THE IMPACT OF THE NEW SALARY LEVEL

As discussed in section V.B, the Department is finalizing its proposal to set
the standard salary level equal to the 35th percentile of earnings of full-time
salaried workers in the lowest-wage Census Region, which, based on the most
recent earnings data, produces a salary level of $1,128 per week. The Department
has analyzed the impact of the new salary level, applying generally the same
metrics that it applied in the Start Printed Page 32879 NPRM. Upon consideration
of the comments received, the Department concludes that this salary level meets
the objectives it sought to achieve in undertaking this rulemaking: preserving
the primary role of an analysis of employee duties in determining EAP exemption
status; fully restoring the initial screening function of the salary level; and
more effectively identifying in a one-test system who is employed in a bona fide
EAP capacity in a manner that reasonably distributes among employees earning
between the long and short test salary levels and their employers the impact of
the Department's move from a two-test to a one-test system.

The Department intentionally chose a salary level methodology that will ensure
that EAP exemption status for the great majority of white-collar employees will
continue to depend on their duties. Consistent with the NPRM, the Department
thus began by analyzing the impact of the new salary level on all full-time
white-collar salaried workers. The Department continues to believe that an
analysis of how the new salary level will impact all full-time salaried
white-collar workers is necessary to put the salary level and its relation to an
examination of duties in the appropriate context, as this is the universe of
workers who could potentially be impacted by an increase in the standard salary
level. As noted above, commenters representing employers did not directly
challenge this aspect of the Department's analysis. And many commenters
representing workers effectively endorsed this approach in stating that the
proportion of full-time salaried workers who earn less than the proposed salary
level shows the relatively modest impact of the proposed salary level in
determining EAP exempt status, in comparison to an examination of duties. See,
e.g., AFL-CIO; EPI; NELP; NWLC.[237]

The Department's analysis confirms that the number of full-time salaried
white-collar workers who will be excluded from the EAP exemption due to the
Department's salary level is greatly exceeded by the far-larger population of
full-time salaried white-collar workers for whom duties will continue to
determine their exemption status. As illustrated in Figure A below, of the
approximately 45.4 million full-time salaried white-collar workers in the United
States subject to the FLSA,[238] about 12.7 million earn below the new salary
level of $1,128 per week, and about 32.7 million earn above the salary
level.[239] Thus, approximately 28 percent of full-time salaried white-collar
workers (most of whom, as discussed below, do not perform EAP duties) earn below
the new salary level, whereas approximately 72 percent of full-time salaried
white-collar workers earn above the salary level and would have their exemption
status turn on their job duties.

FIGURE A—DISTRIBUTION OF FULL-TIME SALARIED WHITE-COLLAR WORKERS BY WEEKLY
EARNINGS

Scrutinizing these figures more closely reinforces the continued importance of
the duties test under the final rule. Of the approximately 12.7 million
full-time salaried white-collar workers who earn below the new salary level of
$1,128 per week, about 8.3 million earn below the long test salary level of $942
per week. With the exception of the 2019 rule when the Department set the salary
level slightly lower, the Department has always set salary levels that screened
from exemption workers earning below the long test salary level. As discussed in
section V.B, the long test salary level is a key parameter for determining an
appropriate salary level.[240] The number of full-time salaried white-collar
workers for whom salary would be determinative of their nonexempt status and who
earn at least the long test salary level—4.3 million—is over seven times smaller
than the number of full-time salaried white-collar workers for whom job duties
would continue to be determinative of their exemption status because they earn
at least the new salary level—32.7 million.

In analyzing how the Department's new salary level will impact all salaried
white-collar workers, the Department also considered the extent to which
full-time salaried white-collar workers across the income distribution perform
EAP duties. As the Department stated in Start Printed Page 32880 the NPRM and
the 2019 rule, the salary level has historically served as “a helpful indicator
of the capacity in which an employee is employed, especially among lower-paid
employees; however, the salary level should not eclipse the duties test.[241] In
considering the extent to which full-time salaried white-collar workers perform
EAP duties, the Department uses probability estimates of passing the standard
duties test, as it did in the NPRM.[242]

The Department's analysis shows that the new salary level is a helpful indicator
of whether salaried workers perform EAP duties, since a minority of full-time
salaried white-collar workers who earn less than the salary level meet the
standard duties test, whereas a large majority of such workers who earn more
than the salary level meet the standard duties test. As illustrated in Figure B,
of the 12.7 million full-time salaried white-collar workers who earn less than
$1,128 per week, the Department estimates that only 38 percent—about 4.8 million
workers—meet the standard duties test. In contrast, of the 32.7 million
full-time salaried white-collar workers who earn at least $1,128 per week, a
large majority—77 percent, or about 25.3 million workers—meet the standard
duties test.[243] The number of full-time salaried white-collar workers who meet
the standard duties test and earn below the salary level is thus over five times
smaller than the number of full-time salaried white-collar workers who meet the
standard duties test and earn at least the salary level amount.[244] And 84
percent of all full-time salaried white-collar workers who meet the standard
duties test—25.3 million out of a total of approximately 30.0 million—earn at
least the new salary level.[245]

FIGURE B—SALARIED WHITE-COLLAR WORKERS EARNING ABOVE AND BELOW THE STANDARD
SALARY LEVEL WHO MEET OR DO NOT MEET THE STANDARD DUTIES TEST

The Department disagrees with commenters that challenged its use of its
probability codes to determine whether a worker meets the duties test in light
of changes in occupational codes and the duties test since the Start Printed
Page 32881 probability codes were first developed. The Department has used the
probability codes to estimate the number of workers who meet the duties test in
its last three EAP rules.[246] As noted in section VII, although the probability
codes were developed 25 years ago, the standard duties test is not substantively
different from the former short duties tests reflected in the probability
codes,[247] and the Department used occupational crosswalks to map the
occupational codes on which the probability codes were originally based onto the
2018 Census occupational codes, which are used in the most recent CPS MORG
data.[248] Additionally, the Department verified the continued appropriateness
of the probability codes in 2016 through a review of the O*NET database,[249]
which confirmed that the probability codes reflected current occupational
duties.[250] The Department's probability codes remain reliable and appropriate
indicators for evaluating whether workers meet the standard duties test.

Consistent with the NRPM, the Department next examined how the new salary level
will impact salaried white-collar workers earning between the historic long and
short test thresholds. As discussed in section V.B, the long and short test
salary levels are important parameters for assessing the appropriateness of the
salary level. Under the final rule, duties will continue to be determinative of
exemption status for a majority of white-collar workers earning between these
thresholds. As illustrated in Figure C, of the approximately 10.8 million
salaried white-collar workers who earn between the long test salary level of
$942 per week and the short test salary level of $1,404 per week, about 40
percent (4.3 million) earn below the new salary level, and about 60 percent (6.5
million) earn at or above the new salary level. Moreover, of the 4.3 million
workers earning between the long test and the new standard salary level, almost
half do not meet the standard duties test.[251]

FIGURE C—SALARIED WHITE-COLLAR WORKERS BETWEEN THE LONG AND SHORT TEST SALARY
LEVELS WHO MEET OR DO NOT MEET THE STANDARD DUTIES TEST

Commenters representing workers pointed to the proportion of full-time salaried
workers who earned below the short test salary level in 1975, as compared to the
proportion of full-time salaried workers who earned below the proposed salary
level, in stating that the Department could or should set the salary level
higher than the proposed salary level. See, e.g., AFL-CIO; EPI; NELP; NWLC. As
emphasized above, the Department agrees that the short test and long test salary
levels are key parameters for assessing the appropriateness of a salary level in
a one-test system. It is also useful to put any salary level in historical
context.

However, the Department notes that under the two-test system, employers could
also use the long test, which paired a lower salary level with a more rigorous
duties test. Accordingly, a segment of the workers who earned below the short
test salary level in 1975—those who earned between the short and long test
salary levels and Start Printed Page 32882 performed limited amounts of
nonexempt work—were still exempt from overtime under the long test even though
they earned below the short test salary level. As explained in section V.B.4,
the Department has elected to set the salary level well below the short test
salary level in part because setting it in the short test salary range would
prevent employers from using the EAP exemption for this entire population of
historically exempt workers.

Lastly, the Department also looked at the impact of the new salary level on
currently exempt employees—those salaried white-collar workers who meet the
standard duties test and earn at least $684 per week. As with every prior
rulemaking to increase the part 541 salary levels, a relatively small percentage
of currently exempt workers will become nonexempt. Of the approximately 45.4
million salaried white-collar workers in the United States, approximately 29.3
million currently qualify for the EAP exemption.[252] Of these 29.3 million
presently exempt workers, just 4.0 million earn at or above the current $684 per
week standard salary level but less than $1,128 per week and will, without some
intervening action by their employers, become entitled to overtime protection as
a result of the combined effect of the initial update and the subsequent
application of the new standard salary level in this rule. A test for exemption
that includes a salary level component will necessarily result in a number of
workers who earned at or above the prior salary level and pass the duties test
becoming nonexempt when the salary level is increased. As the Department has
consistently found since 1938, salary is an important indicator of whether an
individual is employed in a bona fide EAP capacity and therefore a key element
in defining the exemption.

As the Department explained in its analysis of the impact of the proposed salary
level, the new salary level will impact the exemption status of two distinct and
important, but relatively small, groups of lower-paid EAP workers. First, the
new salary level will restore overtime protections to 1.8 million currently
exempt workers who meet the standard duties test but earn less than the
equivalent of the long test salary level ($942 per week). Such employees were
excluded from the EAP exemption under every rule prior to 2019, either by the
long test salary level itself, or under the 2004 rule standard salary level,
which was set equivalent to the long test salary level. Fully restoring the
salary level's initial screening function requires a salary level that will
ensure all employees who earn below the long test level are excluded from the
exemption.

Second, the new salary level will result in overtime protections for an
additional 2.2 million currently exempt workers who meet the standard duties
test and earn between the long test salary level ($942 per week) and the final
salary level. As explained earlier, the Department is setting the standard
salary level above the long test level to account for the shift to a one-test
system in a manner that reasonably distributes the impact of this switch. The
final rule will limit the number of affected workers by setting a standard
salary level below the midpoint between the long and short test salary levels
and by using earnings data from the lowest-wage Census Region (the South).

Even among the 4.0 million workers affected by the combination of the initial
update and the subsequent application of the new standard salary level in this
rule, the fact that a large share of these workers earn below the long test
level underscores the modest role of the final salary level. Beyond the 1.8
million workers earning less than the long test salary level—to whom the final
rule will simply restore overtime protections that they had under every rule
prior to 2019—the increase in the salary level will affect the exemption status
of 2.2 million workers. This group makes up about 8 percent of all currently
exempt, salaried white-collar workers and just under 5 percent of all salaried
white-collar workers.[253] The salary level methodology adopted in this rule
will thus maintain the “useful, but limited, role” of the salary level in
defining and delimiting the EAP exemption.[254]

Finally, the Department does not agree with commenters that stated that it
underestimated the number of affected workers in the NPRM. Commenters that
asserted the number of affected workers could be much higher generally
referenced estimates of the number of workers earning between the current salary
level and the proposed salary level, regardless of whether they passed the
duties test, and then posited that up to that many workers ( e.g., 7.2 million,
7.5 million, or 12.3 million) could be affected. See AFPI; NRF; Rachel Greszler.
The position that all workers earning below the new salary level, regardless of
their duties, will be affected by the new salary level fails to account for the
fact that that millions of these workers are already nonexempt because they fail
the duties test. The exemption status of workers who fail the duties test will
not be affected by this rule.

Determining the workers who will be affected by a change in the salary level
requires an examination of workers' earnings and their duties. Consistent with
the NPRM, the Department determined the populations of currently exempt workers
who will be affected by the salary level by applying its probability codes. For
the reasons discussed earlier in this section and in section VII below, the
Department's probability codes are reliable and appropriate indicators of
whether an employee meets the standard duties test. The Department has
consistently applied this methodology in all its recent part 541 rules.[255]
Though some commenters criticized the Department's method for calculating the
affected worker figure, they did not offer an alternate methodology for
determining which workers pass the current duties test, let alone one as robust
and proven as the Department's probability codes.

C. HIGHLY COMPENSATED EMPLOYEES

In the 2004 rule, the Department created the HCE test for certain highly
compensated employees. Combining a much higher compensation requirement with a
minimal duties test, the HCE test is based on the rationale that employees who
earn at least a certain amount annually—an amount substantially higher than the
annual equivalent of the weekly standard salary level—will almost invariably
pass the standard duties test.[256] The HCE test's primary purpose is therefore
to serve as a streamlined alternative for very highly compensated employees
because a very high level of compensation is a strong indicator of an employee's
exempt status, thus eliminating the need for a detailed duties analysis.[257]

Start Printed Page 32883

As outlined in § 541.601, to be exempt under the HCE test, an employee must
earn at least the amount specified in the regulations in total annual
compensation—presently $107,432 per year.[258] Of this HCE threshold amount, no
less than the full standard salary level amount must be paid on a salary or fee
basis.[259] Finally, the employee must “customarily and regularly perform[ ] any
one or more of the exempt duties or responsibilities of an executive,
administrative, or professional employee[.]” [260] The HCE test applies only to
employees whose primary duty includes performing office or non-manual work.[261]

Employees qualifying for exemption under the HCE test must receive at least the
standard salary level per week on a salary or fee basis, while the remainder of
the employee's total annual compensation may include commissions,
nondiscretionary bonuses, and other nondiscretionary compensation.[262] Total
annual compensation does not include board, lodging, or other facilities, and
does not include payments for medical insurance, life insurance, retirement
plans, or other fringe benefits. An employer is permitted to make a final
“catch-up” payment during the last pay period or within 1 month after the end of
the 52-week period to bring an employee's compensation up to the required level.

As stated in the NPRM, the Department continues to believe that the HCE test is
a useful alternative to the standard salary level and duties tests for highly
compensated employees. However, as with the standard salary level, the HCE total
annual compensation level must be updated to ensure that it remains a meaningful
and appropriate standard to pair with the minimal HCE duties test. To maintain
the HCE test's role as a streamlined alternative for those employees most likely
to meet the standard duties test, the HCE total annual compensation level must
be high enough to exclude all but those employees “at the very top of [the]
economic ladder[.]” [263] The proposal noted that when it was created in 2004,
the HCE test featured a $100,000 threshold that exceeded the annual earnings of
approximately 93.7 percent of salaried workers nationwide.[264] More recently in
the 2019 rule, the Department set the HCE test threshold so it would be
equivalent to the annual earnings of the 80th percentile of full-time salaried
workers nationwide. At the time of the NPRM, however, the $107,432 per year HCE
threshold covered only 72 percent of full-time salaried workers nationwide.[265]

The Department proposed to update the HCE test by setting the total compensation
amount equal to the annualized weekly earnings of the 85th percentile of
full-time salaried workers nationwide. Based on earnings data used in the NPRM,
this proposed methodology resulted in a proposed HCE threshold of $143,988, of
which at least $1,059 per week (the proposed standard salary level) would have
to be paid on a salary or fee basis.[266] The Department noted that its proposed
methodology would produce an HCE threshold that was higher than under the
methodology adopted in the 2019 final rule (which set the HCE threshold equal to
the annualized weekly earnings of the 80th percentile of full-time salaried
workers nationwide),[267] but lower than under the 2004 rule (which covered 93.7
percent of salaried workers nationwide) and the method adopted in the 2016 rule
(which would have covered 90 percent of salaried workers nationwide).[268] In
justifying the proposed HCE threshold, the Department explained in the NPRM that
it was concerned that repeating the 2019 rule's methodology now would not
produce a threshold high enough to reserve the HCE test for employees at the top
of today's economic ladder and could risk the unintended exemption of large
numbers of employees in high-wage regions.[269]

The Department is finalizing its proposal to increase the HCE total compensation
threshold to the 85th percentile of annualized weekly earnings of full-time
salaried workers nationwide. Applying this methodology to calendar year 2023
earnings data results in a total compensation threshold of $151,164 per year.
This approach will guard against the unintended exemption of workers who are not
bona fide executive, administrative, or professional employees, including those
in higher-income regions and industries.

As in prior rulemakings, the Department received significantly less feedback
from commenters on the proposed increase to the HCE threshold than on the
proposed increase to the standard salary level. Most commenters did not address
the issue. Among the comments that addressed the proposed HCE threshold,
stakeholder sentiment was split; employee representatives generally supported
the proposed increase or asked for a higher increase, while most employer
representatives favored a smaller increase or no increase at all.

A number of commenters expressed support for the proposed increase to the HCE
threshold. See, e.g., AFT; AFL-CIO; Coalition of State AGs. For example, the
Coalition of State AGs asserted that “[s]ignificant inflation since the 2019
rule became effective in January 2020 has eroded the purchasing power of the HCE
salary level” and remarked that the HCE threshold “could arguably be made even
higher than the proposed level, particularly for high-cost, high-wage states[.]”
The National Partnership described the proposed HCE threshold as “in line with
historic and economic precedent,” while the AFT commented that the proposed HCE
threshold “will ensure [that] workers in the health care sector, and workers who
provide a wide range of services and expertise for state and local governments,
are not completely excluded from possibly qualifying for overtime.”

A handful of commenters advocated for the adoption of a higher HCE threshold
than proposed. Noting that the HCE threshold originally exceeded the earnings of
93.7 percent of all salaried employees nationwide when it was introduced in
2004, Sanford Heisler Sharp asserted that the Department's proposal to set the
HCE threshold at the 85th percentile “introduces a substantial risk of harming
employees who truly need overtime protections.” NELA and Nichols Kaster urged
the Department to repeat the approach it took in the 2016 rule, which set the
HCE threshold equal to the 90th percentile of salaried earnings nationwide.
Invoking Start Printed Page 32884 the FLSA's policy goal of spreading
employment, NELA also opined that “an overly permissive HCE [test] will result
in fewer `highly compensated' jobs available for workers aspiring to climb the
economic ladder to benefit themselves and their families.”

Employer stakeholders that addressed the HCE threshold opposed the Department's
proposed increase, with many commenters disputing that the current HCE threshold
should be increased at all. See, e.g., ABC; AHLA; Argentum & ASHA; NAW; Visiting
Angels. A number of commenters that opposed the proposed HCE threshold asserted
that it would be administratively burdensome to reevaluate the exemption status
of employees who earn between the current and proposed HCE thresholds. See,
e.g., HR Policy Association; NAM; NCFC. PPWO commented that “[e]mployers will be
faced with the task of reviewing the basis on which each employee was accorded
exempt status, including employees for whom the exempt status decision was made
a decade ago and who may be among the most highly paid employees in the
company.”

Other employer-side stakeholders opposed the proposed HCE threshold but
indicated (either in the alternative or outright) that they would be open to a
smaller increase. Several commenters stated an increase to the HCE threshold
using the 80th percentile methodology applied in the 2019 rule would be
preferable. See, e.g., CWC; LeadingAge; RILA; see also Chamber (asserting that
the NPRM “does not address whatsoever why the 80th percentile [methodology]
would be insufficient”). National Restaurant Association asserted that if the
Department changes the HCE threshold, it “should calculate any new HCE highly
compensated level by using data from the South Census Region, rather than on a
nationwide basis, to ensure that the HCE exemption is at least within reach of
some employers in the lowest-wage regions in the country.” WFCA similarly
recommended that the Department set the HCE threshold at the 85th percentile of
salaried earnings in lowest-wage Census Region or, alternatively, use the 80th
percentile of national data for full-time salaried workers ( i.e., the 2019
rule's approach).

Having considered the comments received, the Department is finalizing its
proposal to increase the HCE threshold to the 85th percentile of annualized
weekly earnings of full-time salaried earnings nationwide. This results in a new
HCE threshold of $151,164 per year, using calendar year 2023 earnings data, of
which at least $1,128 per week (the standard salary level) must be paid on a
salary or fee basis.[270]

As an initial matter, the Department maintains that the current HCE threshold
must be increased. In nominal terms, the current $107,432 HCE threshold is only
7 percent higher than the $100,000 HCE threshold that was introduced in 2004
and, as multiple commenters noted, it has failed to keep up with wage growth
over the last 20 years. According to 2023 earnings data, the current HCE
threshold ($107,432) now covers just 70 percent of full-time salaried workers
nationwide, less than the 80 percent of such workers that it covered when it was
set in 2019. This coverage would continue to decrease in the absence of an
increase, which is needed to reserve the HCE test for employees “at the very top
of today's economic ladder,” [271] as the Department originally intended.
Inaction could risk the unintended exemption of employees in higher-income
regions and industries who clearly are outside of the scope of the
exemption.[272]

The Department concludes that increasing the HCE threshold to the 85th
percentile of annualized weekly earnings of full-time salaried workers
nationwide will ensure that the threshold is sufficiently high to provide a
meaningful and appropriate complement to the minimal HCE duties test, and that
nearly all of the highly paid white-collar workers earning above this threshold
“would satisfy any duties test.” [273] The Department considered keeping the
2019 rule's methodology for the HCE threshold ( i.e., the 80th percentile of
earnings of full-time salaried employees nationwide) and applying it to current
earnings data. However, the Department reaffirms its determination from the NPRM
that this methodology is not appropriate because it does not produce a threshold
high enough to reserve the HCE test for employees who would almost invariably
pass the standard duties test. The Department agrees with commenters that stated
that setting the HCE threshold at the annualized weekly earnings of the 85th
percentile of full-time salaried workers nationwide will guard against the
unintended exemption of workers who are not bona fide executive, administrative,
or professional employees, including those in higher-income regions and
industries.

The Department disagrees that the new HCE threshold is too high. Adjusting for
wage growth, the proposed HCE threshold is significantly lower than the original
HCE threshold that was introduced in 2004 (which surpassed the earnings of 93.7
percent of full-time salaried workers). Going forward, employers with employees
affected by the increased HCE threshold can still use the standard exemption
criteria to take advantage of the EAP exemption. The HCE test is a streamlined
alternative to the standard exemption criteria for a select class of employees
who are so highly paid that they will almost invariably pass the standard duties
test.[274] By design, the HCE test is reserved for employees “at the very top of
today's economic ladder” who would satisfy “any duties test” in “virtually
every” case.[275] This exclusivity is necessary because of the risk that the HCE
test poses to salaried employees in high-income regions and industries who are
not bona fide EAP employees, which the Department acknowledged when the HCE test
was created in 2004.[276]

Although the Department has previously acknowledged that the HCE test may exempt
some employees who fail the standard duties test and would otherwise be entitled
to overtime pay, such outcomes should be “rare,” involving employees whose pay
is high enough that their exemption “would not defeat the objectives of section
13(a)(1) of the Act.” [277] The only way to ensure that the HCE test serves its
intended purpose— i.e., serving as an efficient, streamlined test for employees
who would “almost invariably” meet the standard duties test—is for the test to
include an earnings threshold high enough to exclude nearly all employees whose
EAP status may be questionable. The exemption status of such employees should be
determined by the standard exemption criteria.

The Department acknowledges that some commenters requested the adoption of a
higher HCE threshold, closer in magnitude to the original $100,000 HCE threshold
that was Start Printed Page 32885 adopted in 2004. As noted above, the original
HCE threshold exceeded the earnings of over 93 percent of salaried white-collar
workers when it was adopted. Germane to these comments, the Department
considered repeating the approach it took in the 2016 final rule and proposed in
the 2019 NPRM of setting the HCE threshold at the annualized weekly earnings of
the 90th percentile of full-time salaried workers nationwide, which would result
in a threshold of $179,972 per year. As noted in the NPRM, however, the
Department is concerned that an HCE threshold set at $179,972 could unduly
restrict the use of the HCE test for employers in lower-wage regions and
industries.[278] While the new HCE threshold does not exclude from the HCE test
as high a percentage of full-time salaried employees as the HCE threshold
initially adopted in 2004, it excludes a sufficiently large percentage ( i.e.,
85 percent of full-time salaried employees nationwide) to guard against the
unintended exemption of employees in higher-income regions and industries who
are not bona fide EAP employees.

For all of the reasons provided above, the Department adopts its proposal to set
the HCE threshold equal to the annualized weekly earnings of the 85th percentile
of full-time salaried workers ($151,164). This new level will be applicable on
January 1, 2025.

D. SEVERABILITY

1. THE DEPARTMENT'S PROPOSAL

The Department proposed to add a severability provision to its part 541
regulations at § 541.5. Proposed § 541.5 stated that if any provision of this
part is held to be invalid or unenforceable by its terms, or as applied to any
person or circumstance, or stayed pending further agency action, the Department
intended that the provision be given the fullest effect permitted by law, unless
the provision is held to be completely invalid or unenforceable, in which case,
the Department intended the provision to be severable and not to affect the
remaining provisions.

The Department illustrated the intended effect of proposed § 541.5 with some
examples. The Department noted that it was its intent that the proposed updating
mechanism be effective even if the proposed increase in the standard salary
level were invalidated. It was also the Department's intent that the proposed
increase in the HCE total annual compensation threshold be effective even if the
increase in the standard salary level were invalidated. And it was the
Department's intent that the proposed increases in the standard salary level and
HCE annual total compensation requirement apply even if the updating mechanism
was determined to be invalid.[279]

The Department is finalizing § 541.5, Severability, as proposed, with that
addition of clarifying language as discussed below.

2. DISCUSSION OF COMMENTS AND FINAL RULE

Most commenters did not address proposed § 541.5. Of the few commenters that did
address the Department's severability proposal, the Administrative Law
Professors and NELP supported the inclusion of a severability provision in the
final rule.

In expressing their support, the Administrative Law Professors provided the most
in-depth discussion of the Department's proposed severability provision. The
Administrative Law Professors explained that a provision of a rule is severable
where the agency intends for the remainder of the rule to be effective, even if
the provision is invalidated, and the rule would be workable absent the
provision, citing precedent from the U.S. Supreme Court and the U.S. Court of
Appeals for the District of Columbia Circuit.[280] The professors noted that the
Department “clearly state[d] [its] intention” in proposed § 541.5 that the
updating mechanism in proposed § 541.607 “be effective even if the proposed
increase in the standard salary level is invalidated.” They further noted that
the Department “expresse[d] the same intention with regard to the implementation
of the HCE total annual compensation requirement whether or not the standard
salary level is invalidated” and “the application of the Department's proposed
2023 earnings thresholds, whether or not automatic updating is upheld.”

The Administrative Law Professors observed that the Department's inclusion of a
severability provision in the NPRM was consistent with guidance from the
Administrative Conference of the United States (ACUS), which advised agencies in
a 2018 report [281] to address severability in the text and preamble of both the
NPRM and the final rule where the agency intends the provisions of a rule to be
severable and anticipates that the rule may be challenged in court. The
professors suggested that the Department further explain in the final rule how
the rule “would remain workable” if any of its provisions were declared invalid.
As an example, the professors suggested stating explicitly that invalidation of
the updating provision “would have no bearing on the rationality or
administrability of the standard salary and HCE salary thresholds” as set in the
rule. They further noted that in the event of the invalidation of either the
standard salary level or the HCE compensation threshold, the updating provision
could function independently because “updating would simply take as the 2023
baseline the thresholds left in place from the 2019 rule.” The Administrative
Law Professors made clear that expanding the explanation of “the independent
workability of any of the rule's provisions” should not be seen as an indication
of legal vulnerability but instead as merely an acknowledgement of the
possibility of legal challenge.

NELP also supported the proposed severability provision, noting the “vital
importance” of the proposed rule to millions of workers. Specifically, NELP
stated that if any provision of the rule “is deemed legally questionable, only
that provision should be stayed while litigation proceeds.”

A small number of commenters representing employer interests specifically
opposed the proposed severability provision or criticized the Department's
severability proposal. Indiana Chamber of Commerce and U-Haul Holding Company
(U-Haul) stated that the proposed severability provision was an acknowledgement
of the legal vulnerability of the Department's proposed updating section. The
YMCA stated that the Department failed to explain the need for, or
appropriateness of, the proposed severability provision, and RILA asserted that
the Department failed to explain how the proposed rule would function if any of
its provisions were declared invalid. The Chamber and the National Association
of Convenience Stores asserted that the Department should withdraw the
severability provision.

The Chamber further asserted that, pursuant to the district court decision Start
Printed Page 32886 invalidating the 2016 rule, “the automatic increase provision
in the Proposed Rule cannot survive if the increase to the minimum salary level
is struck down.” The Department does not read the court's decision as
substantively examining the validity of the 2016 rule's automatic updating
provision or analyzing whether that provision was severable from the remainder
of the rule. And importantly, the 2016 rule did not contain a severability
provision or discuss the Department's intent regarding severability of the
provisions of that rule. In contrast, the Department's current NPRM included a
severability provision and a detailed discussion of the Department's intent that
specifically addressed severability of the updating provision. As the
Administrative Law Professors noted, as proposed, the updating provision was not
dependent on the proposed increases to the standard salary level and the HCE
compensation threshold. If either of the new thresholds were vacated, the
updating provision would simply use the existing methodologies set in the 2019
rule as the baseline for the update ( i.e., the Department would apply those
methodologies triennially to update the earnings thresholds as established in
§ 541.607). This is a significant change from the 2016 updating provision, which
would have updated the standard salary level and HCE total compensation
requirement based on the specific methodologies set in that rule and facially
could not function if those methodologies were invalidated.[282]

Upon consideration of the comments received, the Department is finalizing the
severability provision in § 541.5 as proposed, with an additional sentence to
further clarify its intent. The Department intends that each of this rule's
provisions be considered separate and severable and operate independently from
one another. The Department is revising § 541.5 to state this explicitly. In
this regard, the Department intends that if any application of a provision is
stayed, enjoined, or invalidated, the provision be construed to continue to give
the maximum effect to the provision permitted by law. In the event any provision
within a section of the rule is stayed, enjoined, or invalidated, the Department
intends that all remaining provisions within that section, plus all other
sections, remain effective and operative. And in the event any whole section of
the rule is stayed, enjoined, or invalidated, the Department intends that all
remaining sections remain effective and operative.

It is the Department's position that the provisions and sections of the rule can
function sensibly in the event that any specific provisions, sections, or
applications are invalidated, enjoined, or stayed. To begin, the new standard
salary level set forth in § 541.600(a)(2) of $1,128 per week—the 35th percentile
of weekly nonhourly earnings in the lowest-wage Census Region—can function
sensibly, even if, for instance, the rule's new updating section or the revision
to the HCE total compensation requirement are stayed, enjoined, or invalidated.
The revision to the standard salary level under the new methodology operates
independently of and does not depend on either the new updating section or the
revision to the HCE total compensation requirement. If, for instance, the
triennial updating of the standard salary level were invalidated, the new salary
level of $1,128 would still go into effect, and it would remain $1,128 per week
until the Department conducts further rulemaking. The new standard salary level
of $1,128 per week would also still take effect if the initial update to the
standard salary level were invalidated.[283] And the new standard salary level
would still go into effect and function sensibly if the revision to the HCE
total compensation requirement were invalidated as well. Notably, in such an
event, the total annual compensation an employee would need to receive to
qualify for the HCE test would remain at the existing level; [284] however, the
employee's total annual compensation would need to include at least $1,128 per
week paid on a salary or fee basis. As discussed in section V.B, the revised
standard salary level will work effectively with the standard duties test to
better define who is employed in a bona fide EAP capacity by restoring the
initial screening function that the salary level long fulfilled and adjusting
the salary level to account for the change to a single-test system. Finalizing
the new standard salary level will thus accomplish several of the key objectives
the Department is seeking to achieve in undertaking this rulemaking, even if all
or part of the updating section or the revisions to the HCE total compensation
requirement do not also go into effect.

The revised HCE total compensation requirement of $151,164 per year set forth in
§ 541.601(a)(1)—the 85th percentile of annualized weekly earnings of full-time
nonhourly workers nationally—can also function sensibly, even if the other
provisions of this final rule are stayed, enjoined, or invalidated. The revision
to the HCE total compensation requirement under the new methodology operates
independently of, and does not depend on, either the new updating provision or
the revision to the standard salary level. Accordingly, if, for instance, the
triennial updating of the HCE total compensation requirement were invalidated,
the new HCE total compensation requirement of $151,164 per year would still
become effective, and the HCE total compensation requirement would remain at
that amount until the Department undertakes further rulemaking. If the initial
update to the HCE total compensation requirement were invalidated, the revised
HCE total compensation requirement would still go into effect, too. And the
revised HCE total compensation requirement would still go into effect and
function sensibly if the revision to the standard salary level were invalidated.
In such an event, an employee would need to be paid the new total annual
compensation amount of $151,164 per year to qualify as exempt under the HCE
test, though the total annual compensation would need to include only the
existing standard salary level [285] per week paid on a salary or fee basis. As
noted in section V.C, the HCE test was intended to be limited to those highly
paid employees who would almost invariably meet the standard duties test. The
revision to the HCE total compensation requirement would restore it to a level
that is high enough to avoid the unintended exemption of large numbers of
employees in high-wage regions but not so high as to unduly restrict the use of
the HCE test in lower-wage regions and industries, even if the revisions to the
standard salary level and all or part of the updating provision do not go into
effect.

The new updating section can also function sensibly, independent of the other
provisions of this final rule. As explained in section V, the updating section
provides in § 541.607(a) and (b) that the Department will update the Start
Printed Page 32887 standard salary level and HCE total compensation requirement,
respectively, initially on July 1, 2024 and every 3 years thereafter, to reflect
current earnings data, in accordance with the methodology used to set each
threshold. Both the triennial updating of the earnings thresholds for exemption
and the initial update to these thresholds can function sensibly on their own.

The triennial updating of the earnings thresholds for exemption can function
sensibly, even if the new standard salary level and new HCE total compensation
requirement are stayed, enjoined, or invalidated, as the triennial updates are
based on the methodology used to set each threshold that is in place at the time
of the update. If all the provisions of this rule do go into effect (and
assuming the Department has not engaged in further rulemaking), as discussed in
section V.A, the triennial updates to the standard salary level and HCE total
compensation threshold will be based on the new methodologies established in
this rule: the 35th percentile of weekly nonhourly earnings in the lowest-wage
Census Region and the 85th percentile of annualized weekly earnings of full-time
nonhourly workers nationally, respectively. However, the updating provision does
not depend on the revisions to the standard salary level and HCE methodologies
also going into effect. If, for instance, both the new standard salary level and
HCE total compensation requirement were invalidated, the updating provision
would, as the Administrative Law Professors noted, use the existing
methodologies set in the 2019 rule as the baseline for the each triennial
update: the 20th percentile of weekly earnings of full-time nonhourly workers in
the lowest-wage Census Region and/or retail nationally, in the case of the
standard salary level, and the 80th percentile of annualized weekly earnings of
full-time nonhourly workers nationally, in the case of the HCE test. The
updating section thus ensures that the standard salary level and HCE total
compensation requirement continue to reflect current earnings—among the key
objectives the Department is seeking to achieve in undertaking this rulemaking,
see section V.A—even if the new methodologies for setting these earnings
thresholds do not go into effect.

The initial update of the earnings thresholds for exemption can function
sensibly as well, even if this rule's other revisions do not go into effect, as
the baseline for the initial update to each threshold is the current methodology
established in 2019. Accordingly, if, for instance, the new standard salary
level, new HCE total compensation requirement, and the triennial updating
provision were invalidated, the standard salary level and HCE total compensation
requirement would still be updated on July 1, 2024 to $844 per week and $132,964
per year, respectively. In undertaking this rulemaking, the Department sought
(among other objectives) to account for the considerable earnings growth that
has taken place since it last updated the earnings thresholds for
exemption.[286] The initial updating of the standard salary level and HCE total
compensation requirement ensures these thresholds reflect earnings growth since
the Department's 2019 rule, even if the new methodologies for setting the
standard salary level and the HCE total compensation requirement and the future
triennial updates to these earnings thresholds do not go into effect.

In sum, the Department has taken care to draft this final rule such that its
provisions function independently and is including a severability section,
§ 541.5, to make clear that all the rule's provisions are separate and severable
and should be given the fullest possible effect. As the Administrative Law
Professors observed, this discussion of severability is not an acknowledgement
of the legal vulnerability of any particular provision. However, since some
commenters have indicated that they may challenge all or part of this rule, see
e.g., AFPI, Chamber, NFIB, and the 2016 and 2019 rules were both subject to
legal challenge, the Department, consistent with ACUS guidance, makes explicit
in the regulatory text that it considers the provisions of this rule to be
severable and explains here how the various provisions of the rule can operate
sensibly in the event another provision of the rule is stayed, enjoined, or
declared invalid.

VI. PAPERWORK REDUCTION ACT

The Paperwork Reduction Act of 1995 (PRA), 44 U.S.C. 3501 et seq., and its
attendant regulations, 5 CFR part 1320, require the Department to consider the
agency's need for its information collections, the information collections'
practical utility, the impact of paperwork and other information collection
burdens imposed on the public, and how to minimize those burdens. Under the PRA,
an agency may not collect or sponsor an information collection requirement
unless it displays a currently valid Office of Management and Budget (OMB)
control number.[287]

OMB has assigned control number 1235-0021 to the information collection that
gathers information from complainants alleging violations of the labor standards
that WHD administers and enforces, and OMB has assigned control number 1235-0018
to the information collection, Records to be kept by Employers—Fair Labor
Standards Act. In accordance with the PRA, the Department solicited public
comments on the proposed burden changes to the information collection under
control number 1235-0021 and the proposed burden changes to the information
collection under OMB control number 1235-0018.[288] Because OMB control number
1235-0021 was encumbered by a different rulemaking at the time of submission of
the NPRM to OMB, the Department at that time created a duplicate ICR of
1235-0021 under OMB control number 1235-0NEW to allow the public to comment on
the proposed estimates. The Department submitted a contemporaneous request for
OMB review of the proposed revisions to the existing information collection and
the duplicate ICR in accordance with 44 U.S.C. 3507(d). On October 12, 2023, OMB
issued a notice that assigned the duplicate information collection control
number 1235-0035 and indicated the Department should address comments received
during the NPRM comment period and resubmit for approval at the time of the
final rule. Also on October 12, 2023, OMB issued a notice that continued the
previous approval of the information collection under 1235-0018 under the
existing terms of clearance and advised the Department to address any comments
received during the NPRM comment period and resubmit at the time of the final
rule.

Circumstances Necessitating this Collection: This rulemaking revises 29 CFR part
541 and affects provisions that could be considered to entail collections of
information including (1) the complaint process under which employees may file a
complaint with the Department to investigate potential violations of the laws
administered by the Department, including the FLSA; and (2) disclosure and
recordkeeping requirements for covered employers under the FLSA. This rulemaking
does not impose new information collection requirements. Rather, burdens under
the existing requirements would increase due to the changes in the universe of
employees for whom employers are Start Printed Page 32888 required to maintain
records. The changes adopted in this rulemaking may also cause an initial
increase in burden if more employees file complaints with WHD to collect back
wages under the overtime pay requirements.

Information and technology: There is no particular order or form of records
prescribed by the regulations. A respondent may meet the requirements of this
final rule using paper or electronic means. WHD, to reduce burden caused by the
filing of complaints that are not actionable by the agency, uses a complaint
filing process in which complainants discuss their concerns with WHD
professional staff. This process allows agency staff to refer complainants
raising concerns that are not actionable under federal wage and hour laws and
regulations to an agency that may be able to assist.

Public comments: The Department invited public comment on its analysis that the
rule would create a slight increase in the paperwork burden associated with the
complaint ICR 1235-0021 (submitted as a duplicate ICR at the NPRM stage under
control number 1235-0NEW and later assigned by OMB as 1235-0035) and on the
burden associated with ICR 1235-0018, Records to be kept by employers—Fair Labor
Standards Act. The Department did not receive comments on the ICRs themselves or
any comments submitted regarding the PRA analysis in particular, including the
methodology. No comments were received with respect to the complaint ICR
(1235-0021). However, commenters addressed aspects of the information
collections while commenting on the text of the proposed rule as it relates the
records ICR (1235-0018).

For example, Horizon Health Services commented that “[r]equiring supervisors to
record their hours worked and request overtime, as needed, would [be] a
disruption to business operations by adding a significant administrative
burden.” The University of Dayton agreed that a change would require additional
administrative burden stating, “new training and systems would need to be put in
place for newly nonexempt employees to record their time and for their
supervisors to track and approve their time. They would have to become
accustomed to tracking their hours, being sure not to work unbudgeted hours and
overtime unless approved, and so forth.” Others, like Argentum & ASHA and
Oklahoma Wesleyan University, similarly expressed concerns about the costs
associated with having newly nonexempt employees record their time. SBA Advocacy
stated that “DOL should consider” that “small entities face vast administrative
and operational costs to schedule and track employee hours to minimize overtime
costs.” In addition, some commenters expressed concern that the Department's
cost estimates related to recordkeeping were too low, given among other things
that employers would need to adjust their recordkeeping and payroll systems for
newly overtime-eligible employees. See, e.g., NFIB; PPWO; Seyfarth Shaw. The
National Roofing Contractors Association stated that it “is concerned the
proposed regulation would result in dramatically increased labor costs and
additional paperwork burdens for employers, while also reducing workplace
flexibility and compensation for many workers.”

In response to these comments, the Department observes that most employers
currently have both exempt and nonexempt workers and therefore have systems
already in place for employers to track hours. Additionally, commenters did not
offer alternatives for estimates or make suggestions regarding the methodology
for calculating the PRA burdens. The actual recordkeeping requirements are not
changing in the final rule. However, the pool of workers for whom employers will
be required to make and maintain records has increased under the final rule, and
as a result the burden hours have increased. Included in this PRA section are
the regulatory familiarization costs for this final rule. However, this is a
duplication of the regulatory familiarization costs contained in section VII,
economic impact analysis.

The Department plans to submit these ICR's to OMB upon publication of the final
rule. The agency will publish a notice in the Federal Register to inform the
public of OMB's decision.

Total burden for the subject information collections, including the burdens that
will be unaffected by this final rule and any changes, is summarized as follows:

Type of review: Revision to currently approved information collections.

Agency: Wage and Hour Division, Department of Labor.

Title: Employment Information Form.

OMB Control Number: 1235-0021.

Affected public: Private sector, businesses or other for-profits and Individuals
or Households.

Estimated number of respondents: 29,160 (2,150 from this rulemaking).

Estimated number of responses: 29,160 (2,150 from this rulemaking).

Frequency of response: On occasion.

Estimated annual burden hours: 9,720 (717 burden hours due to this rulemaking).

Capital/Start-up costs: $0 ($0 from this rulemaking).

Title: Records to be kept by Employers—Fair Labor Standards Act.

Type of review: Revision to currently approved information collections.

Agency: Wage and Hour Division, Department of Labor.

OMB Control Number: 1235-0018.

Affected public: Private sector, businesses or other for-profits and Individuals
or Households.

Estimated number of respondents: 4,068,419 (0 from this rulemaking).

Estimated number of responses: 42,725,207 (10,320,000 from this rulemaking).

Frequency of response: On occasion.

Estimated annual burden hours: 1,157,993 (344,000 from this rulemaking).

Capital/Start-up costs: $0 ($0 from this rulemaking).

VII. ANALYSIS CONDUCTED IN ACCORDANCE WITH EXECUTIVE ORDER 12866, REGULATORY
PLANNING AND REVIEW, AND EXECUTIVE ORDER 13563, IMPROVING REGULATION AND
REGULATORY REVIEW

Under Executive Order 12866, OMB's Office of Information and Regulatory Affairs
(OIRA) determines whether a regulatory action is significant and, therefore,
subject to the requirements of the Executive Order and OMB review. As amended by
Executive Order 14094, section 3(f) of Executive Order 12866 defines a
“significant regulatory action” as a regulatory action that is likely to result
in a rule that may: (1) have an annual effect on the economy of $200 million or
more; or adversely affect in a material way the economy, a sector of the
economy, productivity, competition, jobs, the environment, public health or
safety, or state, local, territorial, or tribal governments or communities; (2)
create a serious inconsistency or otherwise interfere with an action taken or
planned by another agency; (3) materially alter the budgetary impact of
entitlements, grants, user fees or loan programs or the rights and obligations
of recipients thereof; or (4) raise legal or policy issues for which centralized
review would meaningfully further the President's priorities or the principles
set forth in the Executive Order. OIRA has determined that this rule is a
“significant regulatory action” within the scope of section 3(f)(1) of Executive
Order 12866.

Executive Order 13563 directs agencies to, among other things, propose or adopt
a regulation only upon a reasoned determination that its benefits justify its
costs; that it is tailored to impose the least burden on society, consistent
with obtaining the regulatory Start Printed Page 32889 objectives; and that, in
choosing among alternative regulatory approaches, the agency has selected those
approaches that maximize net benefits. Executive Order 13563 recognizes that
some costs and benefits are difficult to quantify and provides that, when
appropriate and permitted by law, agencies may consider and discuss
qualitatively values that are difficult or impossible to quantify, including
equity, human dignity, fairness, and distributive impacts. The analysis below
outlines the impacts that the Department of Labor (Department) anticipates may
result from this rule and was prepared pursuant to the above-mentioned executive
orders.

A. INTRODUCTION

1. BACKGROUND

The Fair Labor Standards Act (FLSA or Act) requires covered employers to (1) pay
employees who are covered and not exempt from the Act's requirements not less
than the Federal minimum wage for all hours worked and overtime premium pay at a
rate of not less than one and one-half times the employee's regular rate of pay
for all hours worked over 40 in a workweek, and (2) make, keep, and preserve
records of their employees and of the wages, hours, and other conditions and
practices of employment.

The FLSA provides a number of exemptions from the Act's minimum wage and
overtime pay provisions, including one for bona fide executive, administrative,
and professional (EAP) employees. The exemption applies to employees employed in
a bona fide executive, administrative, or professional capacity, as those terms
are “defined and delimited” by the Department.[289] The Department's regulations
implementing these “white-collar” exemptions are codified at 29 CFR part 541.
Since 1940, the regulations implementing the exemption have generally required
each of the following three tests to be met: (1) the employee must be paid a
predetermined and fixed salary that is not subject to reduction because of
variations in the quality or quantity of work performed (the salary basis test);
(2) the amount of salary paid must meet a minimum specified amount (the salary
level test); and (3) the employee's job duties must primarily involve executive,
administrative, or professional duties as defined by the regulations (the duties
test).

The Department has updated the salary level test many times since its
implementation in 1938. Table 1 presents the weekly salary levels associated
with the EAP exemptions since 1938, organized by exemption and
long/short/standard duties tests. From 1949 to 2004, the Department determined
exemption status using a two-test system comprised of a long test (a lower
salary level paired with a more rigorous duties test that limited performance of
nonexempt work to no more than 20 percent for most employees) and a short test
(a higher salary level paired with a less rigorous primary duties requirement
that did not have a numerical limit on the amount of nonexempt work). In 2004,
rather than update the two-test system, the Department chose to establish a new
single-test system for determining exemption status, setting the standard salary
level test at $455 a week, which was equivalent to the long test salary level,
and pairing it with a standard duties test that was substantially equivalent to
the more lenient short duties test. Because the single standard duties test was
equivalent to the short duties test, employees who met the long test salary
level and previously passed either the more rigorous long, or less rigorous
short, duties test passed the standard duties test. The Department also added a
new highly compensated employee (HCE) test, which used a very minimal duties
test and a very high total compensation test set at $100,000 per year ( see
section II.B.2 for further discussion). In 2016, to address the concern that the
standard test exempted lower-paid salaried employees performing large amounts of
nonexempt work who had previously been protected by the more rigorous long
duties test, the Department published a final rule setting the standard salary
level at $913 per week, which was equivalent to the low end of the historic
range of short test salary levels, and the HCE annual compensation level at
$134,004. This approach restored overtime protection for employees performing
substantial amounts of nonexempt work who earned between the long test salary
level and the low end of the short test salary range, as they failed the new
standard salary level test. As previously discussed, the U.S. District Court for
Eastern District of Texas held the 2016 rule invalid. In 2019, in part to
address the concern raised in the litigation that the approach taken in the 2016
rulemaking would have prevented employers from using the exemption for employees
who earned between the long test salary level and the low end of the short test
salary range and met the more rigorous long duties test, the Department returned
to the methodology used in the 2004 rule and set the salary level at the 20th
percentile of weekly earnings of full-time salaried workers in the South and in
the retail industry nationally. Applying this method to the earnings data
available in 2019 produced a standard salary level that was below the long test
salary level. The current earnings thresholds, as published in 2019, are $684 a
week for the standard salary test and $107,432 per year for the HCE test.

Start Printed Page 32890

TABLE 1—HISTORICAL WEEKLY SALARY LEVELS FOR THE EAP EXEMPTIONS

2. NEED FOR RULEMAKING

The goal of this rulemaking is to set effective earnings thresholds to help
define and delimit the FLSA's EAP exemption. To this end, the Department is
finalizing its proposed change to the standard salary level. Specifically, the
Department is adjusting the standard salary level by setting it equal to the
35th percentile of weekly earnings of full-time salaried workers in the
lowest-wage Census Region (currently the South), based on the most recent year
of Current Population Survey (CPS) data at the time of drafting.[290] Using the
Bureau of Labor Statistics (BLS) 2023 data on percentiles of usual weekly
earnings of nonhourly full-time workers, the standard salary level will be set
at $1,128 per week.[291] Additionally, to maintain the effectiveness of this
test, the Department is finalizing an updating mechanism that will update the
earnings thresholds to reflect current wage data initially on July 1, 2024 and
every 3 years thereafter.

The Department's new standard salary level will, in combination with the
standard duties test, better define and delimit which employees are employed in
a bona fide EAP capacity in a one-test system. As explained in greater detail in
sections III and V.B, setting the standard salary level at or below the long
test salary level, as the 2004 and 2019 rules did, results in the exemption of
lower-salaried employees who traditionally were entitled to overtime protection
under the long test either because of their low salary or because they perform
large amounts of nonexempt work, in effect significantly broadening the
exemption compared to the two-test system. Setting the salary level at the low
end of the historic range of short test salary levels, as the 2016 rule did,
would have restored overtime protections to those employees who perform
substantial amounts of nonexempt work and earned between the long test salary
level and the low end of the short test salary range. However, it also would
have resulted in denying employers the use of the exemption for lower-salaried
employees who traditionally were not entitled to overtime compensation under the
long test, which raised concerns that the Department was in effect narrowing the
exemption. By setting a salary level above the equivalent of the long test
salary level (using current data), the final rule will restore the right to
overtime pay for salaried white-collar employees who prior to the 2019 rule were
always considered nonexempt if they earned below the long test (or long
test-equivalent) salary level. And it will ensure that fewer lower paid
white-collar employees who perform significant amounts of nonexempt work are
included in the exemption. At the same time, by setting it well below the
equivalent of the short test salary level (using current data), the rule will
allow employers to continue to use the exemption for many lower paid
white-collar employees who were made exempt under the 2004 standard duties test.
The new salary level will also more reasonably distribute between employees and
their employers what the Department now understands to be the impact of the
shift from a two-test to a one-test system on employees earning between the long
and short test salary levels.

As the Department has previously noted, the amount paid to an employee is “a
valuable and easily applied index to the `bona fide' character of the employment
for which exemption is claimed, as well as the “principal[ ]” “delimiting
requirement . . . prevent[ing] abuse” of the exemption.[292] Additionally, the
salary level test facilitates application of the exemption by saving employees
and employers from having to apply the more time-consuming duties analysis to a
large group of employees who will not pass it. For these reasons, the salary
level test has been a key part of how the Department defines and delimits the
EAP exemption since the beginning of its rulemaking on the EAP exemption.[293]
At the same time, the salary test's role in defining and delimiting the scope of
the EAP exemption must allow for appropriate examination of employee
duties.[294] Under the final rule, duties will continue to determine the
exemption status for most salaried white-collar employees.

The Department also will adjust the HCE total annual compensation requirement to
the annualized weekly earnings of the 85th percentile of full- Start Printed
Page 32891 time salaried workers nationally ($151,164 using 2023 data). Though
not as high a percentile as the HCE threshold initially adopted in 2004, which
covered 93.7 percent of all full-time salaried workers,[295] the Department's
new HCE threshold will ensure it continues to serve its intended function,
because the HCE total annual compensation level will be high enough to exclude
all but those employees at the very top of the economic ladder.

In this final rule, the Department is not finalizing its proposal in section
IV.B.1 and B.2 of the NPRM to apply the standard salary level to the U.S.
territories subject to the federal minimum wage and to update the special salary
levels for American Samoa and the motion picture industry.[296]

In its three most recent part 541 rulemakings, the Department has expressed its
commitment to keeping the earnings thresholds up to date to ensure that they
remain effective in helping differentiate between exempt and nonexempt
employees. Long intervals between rulemakings have resulted in eroded earnings
thresholds based on outdated earnings data that were ill-equipped to help
identify bona fide EAP employees. In contrast, routine updates of the earnings
thresholds to reflect wage growth will bring certainty and stability to
employers and employees alike. Based on its long experience with updating the
salary levels, the Department has determined that adopting a regulatory
provision for regularly updating the salary levels, with an exception for
pausing future updates under certain conditions, is the most viable and
efficient way to ensure the EAP exemption earnings thresholds keep pace with
changes in employee pay and thus remain effective in helping determine exemption
status. Accordingly, in addition to the salary level changes discussed above,
the Department is including in this rule a mechanism for updating the salary and
compensation levels to reflect current wage data initially on July 1, 2024 and
every 3 years thereafter. As explained in greater detail in section V.A,
employees and employers alike will benefit from the certainty and stability of
regularly scheduled updates.

3. SUMMARY OF AFFECTED WORKERS, COSTS, BENEFITS, AND TRANSFERS

The Department estimated the number of affected workers and quantified costs and
transfer payments associated with this final rule using pooled CPS Merged
Outgoing Rotation Group (MORG) data. See section VII.B.2. The Department
estimates in the first year after implementation, there will be 4.3 million
affected workers.[297] This includes 4.0 million workers (1.0 million at the
first update and 3.0 million when the new salary level is applied) who meet the
standard duties test and earn at least $684 per week but less than $1,128 per
week and will either become eligible for overtime or have their salary increased
to at least $1,128 per week (Table 2).[298] An estimated 292,900 workers will be
affected by the increase in the HCE compensation test from $107,432 per year to
$151,164 per year. In Year 10, with triennial updating of the standard salary
and HCE thresholds, the Department projects that 5.0 million workers will be
affected by the change in the standard salary level test and 1.0 million workers
will be affected by the change in the HCE total annual compensation test.[299]

This analysis quantifies three direct costs to employers: (1) regulatory
familiarization costs; (2) adjustment costs; and (3) managerial costs ( see
section VII.C.3). Total annualized direct employer costs over the first 10 years
were estimated to be $802.9 million, assuming a 7 percent discount rate.[300]
This rule will also transfer income from employers to employees in the form of
increased wages. The Department estimated annualized transfers will be $1.5
billion. Most of these transfers will be attributable to wages paid under the
FLSA's overtime provision; a smaller share will be attributable to the FLSA's
minimum wage requirement. These transfers also account for employers who may
choose to increase the salary of some affected workers to at least the new
threshold so that they can continue to use the EAP exemption.

The Department also provides a qualitative discussion of the potential benefits
and unquantified transfers of this rule, including strengthened overtime
protections for some workers, increased worker productivity, increased personal
time for workers, and reduced reliance on social assistance programs. See
section VII.C.5.

Start Printed Page 32892

TABLE 2—SUMMARY OF AFFECTED WORKERS, REGULATORY COSTS, AND TRANSFERS—STANDARD
AND HCE SALARY LEVELS

B. NUMBER OF AFFECTED EAP WORKERS

1. OVERVIEW

This section explains the methodology used to estimate the number of workers who
will be affected by the final rule. The pool of potentially affected workers is
workers who are currently EAP exempt. In this final rule, as in previous rules,
the Department estimated the current number of EAP exempt workers because there
is no data source that identifies workers as EAP exempt. Employers are not
required to report EAP exempt workers to any central data collection agency or
as part of any employee or establishment survey. The methodology described in
this final rule is consistent with the approach the Department used in the 2004,
2016, and 2019 final rules.[301] To estimate the number of workers who will be
affected by the rule, the new standard salary level and the new HCE total annual
compensation threshold are applied to the earnings of current EAP exempt
workers.

2. DATA

All estimates of numbers of workers used in this analysis were based on data
from the CPS MORG, which is sponsored jointly by the U.S. Census Bureau and
BLS.[302] The CPS is a large, nationally representative sample. Households are
surveyed for 4 months, excluded from the survey for 8 months, surveyed for an
additional 4 months, then permanently dropped from the sample. During the last
month of each rotation in the sample (month 4 and month 16), employed
respondents complete a supplementary questionnaire in addition to the regular
survey.[303] The data in this supplement contain the detailed information on
earnings necessary to estimate a worker's exemption status. Responses are based
on the reference week, which is always the week that includes the 12th day of
the month.

Although the CPS MORG is a large-scale survey, administered to approximately
15,000 households monthly representing the entire nation, it is still possible
to have relatively few observations when looking at subsets of employees, such
as workers in a specific occupation employed in a specific industry, or workers
in a specific geographic location. To increase the sample size, the Department
pooled 3 years of CPS MORG data (2021-2023). Earnings for each observation from
2021 and 2022 were inflated to 2023 dollars using the Consumer Price Index for
All Urban Consumers (CPI-U).[304] The weight of each observation was adjusted so
that the total number of potentially affected EAP workers in the pooled sample
remained the same as the number for the 2023 CPS MORG. Thus, the pooled CPS MORG
sample uses roughly three times as many observations to represent the same total
Start Printed Page 32893 number of workers in 2023. The additional observations
allow the Department to better characterize certain attributes of the
potentially affected labor force. This pooled dataset is used to estimate all
impacts of the final rule.

Some assumptions and adjustments were necessary to use these data as the basis
for the analysis. For example, the Department eliminated workers who reported
that their weekly hours vary and who provided no additional information on hours
worked. This was done because the Department cannot estimate effects for these
workers since it is unknown whether they work overtime and therefore unknown
whether there would be any need to pay for overtime if their status changed from
exempt to nonexempt. The Department reweighted the rest of the sample to account
for this change ( i.e., to keep the same total employment estimates).[305] This
adjustment assumes that the distribution of hours worked by workers whose hours
do not vary is representative of hours worked by workers whose hours vary. The
Department believes that without more information, this is an appropriate
assumption.[306]

3. NUMBER OF WORKERS SUBJECT TO THE FLSA AND THE DEPARTMENT'S PART 541
REGULATIONS

As a starting point for the analysis, based on the CPS MORG data, the Department
estimates that there would be 167.3 million wage and salary workers in Year 1.
Figure 1 illustrates how the Department analyzed the U.S. civilian workforce
through successive stages to estimate the number of affected workers.

FIGURE 1—FLOW CHART OF FLSA EXEMPTIONS AND ESTIMATED NUMBER OF AFFECTED WORKERS

The Department first excluded workers who are unemployed, not subject to its
regulations, or not covered by the FLSA from the overall total number of wage
and salary workers. Excluded workers include military personnel, unpaid
volunteers, self-employed individuals, clergy and other religious workers, and
Federal employees (with a few exceptions described below).

Many of these workers are excluded from the CPS MORG, including members of the
military on active duty and unpaid volunteers. Self-employed and unpaid workers
are included in the CPS MORG, but have no earnings data reported and thus are
excluded from the analysis. The Department identified religious workers by their
occupation codes: `clergy' (Census occupational Start Printed Page 32894 code
2040), `directors, religious activities and education' (2050), and `religious
workers, all other' (2060). Most employees of the Federal Government are covered
by the FLSA but not the Department's part 541 regulations because the Office of
Personnel Management (OPM) regulates their entitlement to minimum wage and
overtime pay.[307] Exceptions exist for U.S. Postal Service employees, Tennessee
Valley Authority employees, and Library of Congress employees.[308] The analysis
identified and included these covered Federal workers using occupation and/or
industry codes and removed other Federal employees.[309]

The FLSA also does not cover employees of firms that have annual revenue of less
than $500,000 and who are not engaged in interstate commerce. The Department
does not exclude them from the analysis, however, because there is no data set
that would adequately inform an estimate of the size of this worker population,
although the Department believes it is a small percentage of workers. The 2004,
2016, and 2019 final rules similarly did not adjust for these workers.

Of the 167.3 million wage and salary workers in the United States, the
Department estimates that 143.7 million are covered by the FLSA and subject to
the Department's regulations (85.9 percent). The remaining 23.7 million workers
are excluded from FLSA coverage for the reasons described above.

4. NUMBER OF WORKERS WHO ARE WHITE-COLLAR, SALARIED, NOT ELIGIBLE FOR ANOTHER
(NON-EAP) OVERTIME EXEMPTION

After limiting the analysis to workers covered by the FLSA and subject to the
Department's part 541 regulations, several other groups of workers were
identified and excluded from further analysis since this final rule is unlikely
to affect them. These include blue-collar workers,[310] workers paid on an
hourly basis, and workers who are exempt under certain other (non-EAP)
exemptions.

The Department excluded a total of 90.2 million workers from the analysis for
one or more of these reasons, which often overlapped ( e.g., many blue-collar
workers are also paid hourly). For example, the Department estimated that there
are 49.1 million blue-collar workers. These workers were identified in the CPS
MORG data following the methodology from the U.S. Government Accountability
Office's (GAO) 1999 white-collar exemptions report [311] and the Department's
2004, 2016, and 2019 regulatory impact analyses.[312] Supervisors in
traditionally blue-collar industries were classified as white-collar workers
because their duties are generally managerial or administrative, and therefore
they were not excluded as blue-collar workers. Using the CPS variable indicating
a respondent's hourly wage status, the Department determined that 80.3 million
workers were paid on an hourly basis in 2023.[313]

Also excluded from further analysis were workers who are exempt under certain
other (non-EAP) exemptions. Although some of these workers may also be exempt
under the EAP exemptions, they would independently remain exempt from the FLSA's
minimum wage and/or overtime pay provisions based on the non-EAP exemptions. The
Department excluded an estimated 3.7 million workers, including some
agricultural and transportation workers, from further analysis because they are
subject to another (non-EAP) overtime exemption. See Appendix A: Methodology for
Estimating Exemption Status, contained in the rulemaking docket, for details on
how this population was identified.

Agricultural and transportation workers are two of the largest groups of workers
excluded from the population of potentially affected EAP workers in the current
analysis, and with some exceptions, they were similarly excluded in other recent
rulemakings. The 2004 rule excluded all workers in agricultural industries from
the analysis,[314] while more recent analyses only excluded agricultural workers
from specified occupational-industry combinations since not all workers in
agricultural industries qualify for the agricultural overtime pay exemptions.
This final rule followed the more recent analyses and only excluded agricultural
workers in certain occupation-industry combinations.[315] The exclusion of
transportation workers matched the method for the 2004, 2016, and 2019 final
rules.[316] Transportation workers are defined as those who are subject to the
following FLSA exemptions: section 13(b)(1), section 13(b)(2), section 13(b)(3),
section 13(b)(6), or section 13(b)(10). The Department excluded 1.0 million
agricultural workers and 2.1 million transportation workers from the analysis.

In addition, the Department excluded another 22,700 workers who qualify for one
or more other FLSA minimum wage and overtime exemptions (and are not either
blue-collar or hourly). The criteria for determining exemption status for these
workers are detailed in Appendix A.

After excluding workers not subject to the Department's FLSA regulations and
workers who are unlikely to be affected by this final rule ( i.e., blue-collar
workers, workers paid hourly, workers who are subject to another (non-EAP)
overtime exemption), the Department estimated there are 53.5 million salaried
white-collar workers for whom employers might claim either the standard EAP
exemption or the HCE exemption.

5. NUMBER OF CURRENT EAP EXEMPT WORKERS

To determine the number of workers for whom employers might currently claim the
EAP exemption, the standard EAP test and HCE test were applied. Both tests
include earnings thresholds and duties tests. Aside from workers in named
occupations (which are not subject to an earnings requirement and are discussed
in the next subsection), to be exempt under the standard EAP test, the employee
generally must:

• be paid a predetermined and fixed salary that is not subject to reduction
because of variations in the quality or quantity of work performed (the salary
basis test); [317]

Start Printed Page 32895
* earn at least a designated salary amount (the standard salary level test,
currently $684 per week); and
* primarily perform exempt work, as defined by the regulations (the standard
duties test).

The HCE test allows certain highly paid employees to qualify for exemption if
they customarily and regularly perform one or more exempt job duties (the HCE
duties test). The current HCE annual compensation level is $107,432, including
at least $684 per week paid on a salary or fee basis.

I. SALARY BASIS

The Department included only nonhourly workers in the analysis based on CPS
data.[318] For this NPRM, the Department considered data representing
compensation paid to nonhourly workers to be an appropriate proxy for
compensation paid to salaried workers. The Department notes that it made the
same assumption regarding nonhourly workers in the 2004, 2016, and 2019 final
rules.[319]

The CPS population of “nonhourly” workers includes salaried workers along with
those who are paid a piece rate, day rate, or largely on bonuses or commissions.
Data in the CPS are not available to distinguish between salaried workers and
these other nonhourly workers. However, the Panel Study of Income Dynamics
(PSID) provides additional information on how nonhourly workers are paid.[320]
In the PSID, respondents are asked how they are paid on their main job and are
also asked for more detail if their response is other than salaried or hourly.
Possible responses include piecework, commission, self-employed/farmer/profits,
and by the job/day/mile. The Department analyzed the PSID data and found that
relatively few nonhourly workers were paid by methods other than salaried. The
Department is not aware of any statistically robust source that more closely
reflects salary as defined in its regulations.

II. SALARY LEVEL

Weekly earnings are available in the CPS MORG data, which allowed the Department
to estimate how many nonhourly workers pass the compensation thresholds.[321]
However, the CPS earnings variable does not perfectly reflect the Department's
definition of earnings. First, the CPS includes all nondiscretionary bonuses and
commissions if they are part of usual weekly earnings. However, the regulation
allows nondiscretionary bonuses and commissions to satisfy up to 10 percent of
the standard salary level. This discrepancy between the earnings variable used
and the regulatory definition of salary may cause a slight overestimation or
underestimation of the number of workers estimated to meet the standard salary
level and HCE compensation tests.[322] Second, CPS earnings data include
overtime pay. The Department notes that employers may factor into an employee's
salary a premium for expected overtime hours worked. To the extent they do so,
that premium would be reflected accurately in the data. Third, the earnings
measure includes tips and discretionary commissions which do not qualify towards
the required salary. The Department believes tips are an uncommon form of
payment for these white-collar workers. Discretionary commissions tend to be
paid irregularly and hence are unlikely to be counted as “usual earnings.”
Additionally, as noted above, most salaried workers do not receive commissions.

Lastly, the CPS annual earnings variable is topcoded at $150,000 through the
March 2023 data.[323] Topcoding refers to how data sets handle observations at
the top of the distribution and is performed to protect the confidentiality of
data provided by CPS respondents. For the CPS annual earnings variable, workers
earning above $2,884.61 ($150,000 ÷ 52 weeks) per week are reported as earning
$2,884.61 per week. The Department imputed earnings for topcoded workers in the
CPS data to adequately estimate impacts.[324]

III. DUTIES

The CPS MORG data do not capture information about job duties. Therefore, the
Department used probability estimates of passing the duties test by occupational
title to estimate the number of workers passing the duties test. This is the
same methodology used in recent part 541 rulemakings, and the Department
believes it continues to be the best available methodology. The probabilities of
passing the duties test are from an analysis performed by WHD in 1998 in
response to a request from the GAO. Because WHD enforces the FLSA's overtime
requirements and regularly assesses workers' exempt status, WHD was uniquely
qualified to provide the analysis. The analysis was originally published in the
GAO's 1999 white-collar exemptions report.[325]

WHD examined 499 occupational codes and determined that 251 occupational codes
likely included EAP exempt workers.[326] For each, WHD assigned one of four
probability codes reflecting the estimated likelihood, expressed as ranges, that
a worker in that occupation would perform duties required to meet the EAP duties
tests (Table 3). All occupations and their associated probability codes are
listed in Appendix A. Just as in the 2004, 2016, and 2019 final rules, the
Department has supplemented this analysis to account for the HCE exemption. The
Department modified the four probability codes to reflect probabilities of
passing the HCE duties test based on its analysis of the provisions of the
highly compensated test relative to the standard duties test. To illustrate, WHD
assigned exempt probability code 4 to the occupation “first-line
supervisors/managers of construction trades and extraction workers” (Census code
6200), which indicates that a worker in this occupation has a 0 to 10 percent
likelihood of meeting the standard EAP duties test. However, if that worker
earned at least $100,000 annually (now $107,432 annually), they were assigned a
15 percent probability of passing the more lenient HCE duties test.[327]

Start Printed Page 32896

TABLE 3—PROBABILITY WORKER IN CATEGORY PASSES THE DUTIES TESTS

Start Printed Page 32897

The occupations identified in GAO's 1999 report map to an earlier occupational
classification scheme (the 1990 Census occupational codes).[328] For this final
rule, the Department used occupational crosswalks to map the previous
occupational codes to the 2018 Census occupational codes, which are used in the
CPS MORG 2021 through 2023 data. If a new occupation comprises more than one
previous occupation, then the new occupation's probability code is the weighted
average of the previous occupations' probability codes, rounded to the closest
probability code.

These codes provide information on the likelihood that an employee met the
duties tests, but they do not identify which workers in the CPS MORG met the
duties test. For example, for every ten public relations managers, between five
and nine are assumed to meet the standard duties test (based on probability
category 2). However, it is unknown which of these ten workers are exempt;
therefore, for the purposes of producing an estimate, the Department must assign
a status to these workers. Exemption status could be randomly assigned with
equal probability, but this would ignore the earnings of the worker as a factor
in determining the probability of exemption. The probability of qualifying for
the exemption increases with earnings because higher paid workers are more
likely to perform the required duties.[329]

The Department estimated the probability of qualifying for the standard
exemption for each worker as a function of both earnings and the occupation's
exempt probability category using a gamma distribution.[330] Based on these
revised probabilities, each worker was assigned exempt or nonexempt status based
on a random draw from a binomial distribution using the worker's revised
probability as the probability of success. Thus, if this method is applied to
ten workers who each have a 60 percent probability of being exempt, six workers
would be expected to be designated as exempt.[331] For details, see Appendix A
(in the rulemaking docket).

As previously discussed in section V.B.5, some commenters challenged the
Department's use of its probability codes to determine whether a worker meets
the duties test. The Department acknowledges that the probability codes used to
determine the share of workers in an occupation who are EAP exempt are 25 years
old. However, the Department believes the probability codes continue to estimate
exemption status accurately given the fact that the standard duties test is not
substantively different from the former short duties tests reflected in the
codes. For the 2016 rulemaking, the Department reviewed O*NET [332] to determine
the extent to which the 1998 probability codes reflected current occupational
duties. The Department's review of O*NET verified the continued appropriateness
of the 1998 probability codes.[333] The 2019 final rule also used these
probability codes and likewise found that these codes are the best available
methodology to accurately estimate exemption status.[334]

The Department estimates that of the existing 53.5 million salaried white-collar
workers considered in the analysis, 37.9 million currently qualify for the EAP
exemption.

6. POTENTIALLY AFFECTED EXEMPT EAP WORKERS

The Department excluded some of the current EAP exempt workers from further
analysis because the final rule will not affect them. Specifically, the
Department excluded workers in named occupations who are not required to pass
the salary requirements (although they must still pass a duties test) and
therefore whose exemption status does not depend on their earnings. These
occupations include physicians (identified with Census occupation codes 3010,
3040, 3060, 3120), lawyers (2100), teachers (occupations 2200-2550 and
industries 7860 or 7870), academic administrative personnel (school counselors
(occupation 2000 and industries 7860 or 7870) and educational administrators
(occupation 0230 and industries 7860 or 7870)), and outside sales workers (a
subset of occupation 4950). Out of the 37.9 million workers who were EAP exempt,
8.1 million, or 21.4 percent, were expected to be in named occupations. Start
Printed Page 32898 Thus, the changes to the standard salary level and HCE
compensation tests would not affect these workers. The 29.7 million EAP exempt
workers remaining in the analysis are referred to in this final rule as
“potentially affected” (17.8 percent of all workers).

Based on analysis of the occupational codes and CPS earnings data (described
above), the Department has concluded there are 29.7 million potentially affected
EAP workers.[335]

FIGURE 2—EXEMPTION STATUS AND NUMBER OF AFFECTED WORKERS

As shown in Figure 2 above, 8.1 million of the 53.5 million salaried
white-collar workers are in named occupations and will not be affected by a
change in the earnings requirements. The Department also estimates that of the
remaining 45.4 million salaried white-collar workers, about 12.7 million earn
below the Department's new standard salary level of $1,128 per week and about
32.7 million earn above the Department's new salary level. Thus, approximately
28 percent of salaried white-collar employees earn below the new salary level,
whereas approximately 72 percent of salaried white-collar employees earn above
the salary level and will have their exemption status turn on their job duties.

7. NUMBER OF AFFECTED EAP WORKERS

The Department estimated that the increase in the standard salary level from
$684 per week to $1,128 per week will affect 4.0 million workers in Year 1 (of
these 4.0 million affected employees, 1.8 million earn less than the long test
salary level ($942)).[336] The Department estimated that the increase in the HCE
annual compensation level from $107,432 to $151,164 will impact 292,900 workers
(Figure 3).[337] In total, the Department expects that 4.3 million workers out
of the 29.7 million potentially affected workers will be affected in Year 1.
This estimate of 4.3 million affected workers represents only approximately 10
percent of all salaried white-collar workers who are not in named occupations
(45.4 million).

As illustrated in Figure 1 above, this final rule affects a specific and small
portion of all employed workers. In particular, the number of affected workers
is 2.6% of total employed workers in 2023 and represents about 8 percent of all
white-collar salaried workers (including workers in named occupations). While
Figure 1 provides a snapshot of the impacts of this rule in the context of the
broader labor market of 2023, it may also be helpful to understand how the labor
market has grown since the Department first introduced a one-test system in
2004. Broadly, since 2004 the size of the labor force and the white-collar
workforce has grown considerably. Between 2004 and 2023, total employment grew
by 21.8 million, with employment increasing by nearly 10 million since 2016 and
3.5 Start Printed Page 32899 million since 2019.[338] Over this period, the size
of the white-collar workforce has also increased considerably. In 2004, the
total number of white-collar workers who were subject to the Part 541
regulations, including the salary level test, was 31.7 million. By 2016 it had
reached 37.4 million; in 2019 it was 39.8 million; and in 2023 it was nearly
45.4 million.

FIGURE 3—PIE CHART OF POTENTIALLY AFFECTED EMPLOYEES AND THEIR AFFECTED STATUS

Several commenters stated that the Department's estimates of affected workers
were incorrect because of the application of the probability codes. For example,
NCFC stated that “the Department's impact calculations rely on outdated and
flawed data” because the “Department's predictions as to the probability of
employees passing the duties test are based on a 1999 study . . . which itself
relied upon information provided by DOL in the 1990s—more than three decades
ago.” AFPI further added that since the Department's probability codes were
developed, “occupational codes have changed; the Part 541 duties tests have
changed; and litigation has resulted in thousands of court decisions finding
employees to be exempt or non-exempt.” Similarly, NRF included a report by
Oxford Economics stating that there have been numerous economics changes since
1998, “includ[ing] increases in automation, virtual work, computerized
scheduling, and the effects of a global pandemic.” [339] The Oxford Economics
report also stated that “if the relationship between salaried [status] and EAP
exemption status is tighter than the [Department] . . . assumes,” the number of
affected workers could be as high as 7.2 million. AFPI asserted that
approximately “7.5 million employees would be non-exempt for the first time
based on salary alone[.]” Rachel Greszler stated that the correct figure is as
high as 12.3 million workers.

The Department disagrees with commenters that challenged its use of its
probability codes. The Department has used its probability codes to estimate the
number of workers who meet the duties test in its 2004, 2016, and 2019 rules.
The Department reiterates that these codes have been updated and mapped onto
current occupational codes, as explained above. As also noted above, the
standard duties test is not substantively different from the former short duties
tests reflected in the codes. In consequence, the probability codes remain
relevant and are currently the most accurate way to estimate the probability of
a worker satisfying the duties test. Furthermore, while several occupations have
changed over time, modifications affecting specific occupations would only
affect the validity of these probability codes if they systematically affected
an occupation's probability of performing exempt tasks. In contrast, other
changes, such as employees performing remotely the job duties they once
performed in-person, do not affect the validity of these probabilities.
Additionally, the probability codes can still effectively predict whether
employees in new industries will meet the duties test insofar as these
occupations existed in other industries. Finally, as previously noted, the
Department used the O*NET database to confirm the appropriateness of the
probability codes in 2016. Commenters did not provide a basis for concluding
that the Department's 2016 evaluation is obsolete or that the probability codes
no longer provide the most reasonable basis for estimating the population of
affected workers. Start Printed Page 32900

The Department also does not agree with commenters that stated that it
underestimated the number of affected workers in the NPRM. As discussed above,
see section V.B.5.iii, commenters that asserted the number of affected workers
could be much higher generally referenced estimates of the number of workers
earning between the current salary level and the proposed salary level,
regardless of whether they passed the duties test, and then posited that up to
that many workers ( e.g., 7.2 million, 7.5 million, or 12.3 million) could be
affected. The position that all workers earning below the new salary level,
regardless of their duties, will be affected by the new salary level fails to
account for the fact that that millions of these workers are already nonexempt
because they do not meet the duties test.

C. EFFECTS OF REVISED SALARY AND COMPENSATION LEVELS

1. OVERVIEW AND SUMMARY OF QUANTIFIED EFFECTS

The Department is setting the standard salary level using the 35th percentile of
earnings of full-time salaried workers in the lowest-wage Census region
(currently the South) and setting the HCE compensation level at the annualized
weekly earnings of the 85th percentile of full-time salaried workers nationwide.
In both cases the Department used 2023 CPS data to calculate the levels.[340]

Transfers both from employers to employees and between employees, and direct
employer costs, will depend on how employers respond to this rulemaking.
Employer response is expected to vary by the characteristics of the affected EAP
workers. Assumptions related to employer responses are discussed below.

Table 4 presents the estimated number of affected workers, costs, and transfers
associated with increasing the standard salary and HCE compensation levels. The
Department estimated that the direct employer costs of this rule will total $1.4
billion in the first year, with 10-year annualized direct costs of $802.9
million per year using a 7 percent discount rate.

In addition to these direct costs, this rule will transfer income from employers
to employees. Estimated Year 1 transfers will equal $1.5 billion, with
annualized transfers of $1.5 billion per year using the 7 percent real discount
rates and $1.6 billion using the 3 percent discount rate. Potential employer
costs due to reduced profits and additional hiring were not quantified but are
discussed in section VII.C.3.v. These estimates encompass in Year 1 both the
impact of the initial update to the earnings thresholds and the change in those
thresholds that will become applicable 6 months later.[341]

Start Printed Page 32901

TABLE 4—SUMMARY OF AFFECTED WORKERS AND REGULATORY COSTS AND TRANSFERS

2. CHARACTERISTICS OF AFFECTED EAP WORKERS

Table 5 presents the number of affected EAP workers, the mean number of overtime
hours they work per week, and their average weekly earnings. The Department
considered two types of overtime workers in this analysis: regular overtime
workers and occasional overtime workers.[342] Regular overtime workers typically
worked more than 40 hours per week. Occasional overtime workers typically worked
40 hours or less per week, but they worked more than 40 hours in the week they
were surveyed. The Department considered these two populations separately in the
analysis because labor market responses to overtime pay requirements may differ
for these two types of workers.

The 4.0 million workers affected by the combined effect of the initial update
and the subsequent application of the new standard salary level work on average
1.6 usual hours of overtime per week and earn on average $948 per week.[343]
However, most of these workers (about 86 percent) usually do not work overtime.
The 14 percent of affected workers who usually work overtime average 11.1 hours
of overtime per week. In a representative week, roughly 135,000 (or 3.3 percent)
of the 4.0 million affected workers occasionally work overtime; they averaged
8.5 hours of overtime in the weeks they worked overtime.[344] Finally, 20,000
(or 0.5 percent) of all workers affected by the increase in the standard salary
level earn less than the minimum wage.[345]

Start Printed Page 32902

The 292,900 workers affected by the change in the HCE compensation level average
2.9 hours of overtime per week and earn an average of $2,397 per week ($124,668
per year). About 73 percent of these workers do not usually work overtime, while
the 27 percent who usually work overtime average 11.0 hours of overtime per
week. Among the 2.6 percent who occasionally work overtime, they averaged 8.2
hours in the weeks that they worked overtime.

Although most affected workers who typically do not work overtime will be
unlikely to experience significant changes in their daily work routine, those
who regularly work overtime may experience significant changes. Moreover,
affected EAP workers who routinely work overtime and earn less than the minimum
wage will be most likely to experience significant changes. Impacts on employee
hours and earnings are discussed further in section VII.C.4.

TABLE 5—NUMBER OF AFFECTED EAP WORKERS, MEAN OVERTIME HOURS, AND MEAN WEEKLY
EARNINGS, YEAR 1

This section characterizes the population of affected workers by industry,
occupation, employer type, location of residence, and demographics. The
Department chose to provide as much detail as possible while maintaining
adequate sample sizes.

Table 6 presents the distribution of affected EAP workers by industry and
occupation, using Census industry and occupation codes. The industry with the
most affected EAP workers is professional and business services (827,000), while
the industry with the highest percentage of EAP workers affected is leisure and
hospitality (about 24 percent). The occupational category with the most affected
EAP workers is management, business, and financial (2.0 million), while the
occupation category with the highest percentage of EAP workers affected is
farming, fishing, and forestry (about 45 percent).

Potentially affected workers in private-sector nonprofits are more likely to be
affected than workers in private-sector for-profit firms (18.9 percent compared
with 13.6 percent). However, as discussed in section VII.B.3, the estimates of
workers subject to the FLSA include workers employed by enterprises that are not
subject to the FLSA under the law's enterprise coverage requirements because
there is no data set that would adequately inform an estimate of the size of
this worker population in order to exclude them from these estimates. Although
failing to exclude workers who work for non-covered enterprises would only
affect a small percentage of workers generally, it may have a larger effect (and
result in a larger overestimate) for workers in nonprofits because when
determining FLSA enterprise coverage only revenue derived from business
operations, not charitable activities, is included.

Start Printed Page 32903

TABLE 6—ESTIMATED NUMBER OF WORKERS AND WHETHER THEY WILL BE AFFECTED BY THE NEW
EARNINGS THRESHOLDS, BY INDUSTRY AND OCCUPATION, YEAR 1

Start Printed Page 32904

Table 7 presents the distribution of affected EAP workers based on Census
Regions and Divisions, and metropolitan statistical area (MSA) status. The
region with the most affected workers will be the South (1.9 million), but the
South's percentage of potentially affected workers who are estimated to be
affected is relatively small (17.9 percent). Although 90 percent of affected EAP
workers will reside in MSAs (3.92 of 4.34 million), so do a corresponding 88
percent of all workers subject to the FLSA.[346]

Employers in low-wage industries, regions, and in non-metropolitan areas may be
more affected because they typically pay lower wages and salaries. The
Department believes the salary level included in this rule is appropriate for
these lower-wage sectors, in part because the methodology uses earnings data
from the lowest-wage census region. Moreover, the duties test will continue to
determine exemption status for the vast majority of workers in low-wage regions
and industries under the rule. For example, as displayed in Table 7, 82.1
percent of potentially affected EAP workers in the South Census Region earn more
than the new salary levels and thus will not be affected by the rule (8.59 ÷
10.46). Effects by region and industry are considered in section VII.C.7.

Start Printed Page 32905

TABLE 7—ESTIMATED NUMBER OF WORKERS AND WHETHER THEY WILL BE AFFECTED BY THE NEW
EARNINGS THRESHOLDS, BY REGION, DIVISION, AND MSA STATUS, YEAR 1

Table 8 presents the distribution of affected EAP workers by demographics.
Potentially affected women, Black workers, Hispanic workers, young workers, and
workers with less education are all more likely to be affected than other worker
types. This is because EAP exempt workers with these characteristics are more
likely to earn within the affected standard salary range than EAP exempt workers
without these characteristics. For example, of potentially affected workers,
women tend to have lower salaries and are therefore more likely to be in the
affected range. Median weekly earnings for potentially affected women are $1,709
compared to $2,108 for men.

Among potentially affected workers, certain demographic groups—women, Black
workers, Hispanic workers, young Start Printed Page 32906 workers, and workers
with less education—have an increased likelihood of being affected by this
rulemaking, even though workers in these demographic groups are less likely to
be EAP exempt in the first place. Therefore, as a share of all workers, not just
potentially affected workers, workers in these demographic groups may not be
more likely to be affected. For example, when looking at potentially affected
workers, 21.7 percent of potentially affected Black workers are affected, while
only 14.5 percent of potentially affected white workers are affected. However,
when looking at total workers, about the same shares of total Black and total
white workers would be affected (2.9 percent of Black workers and 3.0 percent of
white workers).

Start Printed Page 32907

TABLE 8—ESTIMATED NUMBER OF WORKERS AND WHETHER THEY WILL BE AFFECTED BY THE NEW
EARNINGS THRESHOLDS, BY DEMOGRAPHICS, YEAR 1

Start Printed Page 32908

3. COSTS

I. SUMMARY

The Department quantified three direct costs to employers in this analysis: (1)
regulatory familiarization costs; (2) adjustment costs; and (3) managerial
costs. These are the same costs quantified in the 2016 and 2019 rulemakings. The
Department estimated that in Year 1, regulatory familiarization costs will be
$451.6 million, adjustment costs will be $299.1 million, and managerial costs
will be $685.5 million (Table 9). Total direct employer costs in Year 1 will be
$1.4 billion. Recurring costs are projected in section VII.C.10. The Department
discusses costs that are not quantified in section VII.C.3.v.

TABLE 9—SUMMARY OF YEAR 1 DIRECT EMPLOYER COSTS (MILLIONS)

II. REGULATORY FAMILIARIZATION COSTS

This rulemaking will impose direct costs on firms by requiring them to review
the regulation. To estimate these “regulatory familiarization costs,” three
pieces of information must be estimated: (1) the number of affected
establishments; (2) a wage level for the employees reviewing the rule; and (3)
the amount of time spent reviewing the rule. The Department generally used the
same methodology for calculating regulatory familiarization costs that it used
in the NPRM and recent rulemakings.

Regulatory familiarization costs can be calculated at an establishment level or
at a firm level. The Department assumed that regulatory familiarization occurs
at a decentralized level and used the number of establishments in its cost
estimate; this results in a higher estimate than would result from using the
number of firms. The most recent data on private sector establishments and firms
at the time this rule was drafted are from the 2021 Statistics of U.S.
Businesses (SUSB), which reports 8.15 million establishments with paid
employees.[347] Additionally, there were an estimated 90,126 state and local
governments in 2017, the most recent data available.[348] The Department thus
estimated 8.24 million entities (the term “entities” is used to refer to the
combination of establishments and governments).

The Department assumes that all entities will incur some regulatory
familiarization costs, even if they do not employ exempt workers, because all
entities will need to confirm whether this rulemaking affects their employees.
Entities with more affected EAP workers will likely spend more time reviewing
the regulation than entities with fewer or no affected EAP workers (since a more
careful reading of the regulation will probably follow the initial decision that
the entity is affected). However, the Department did not know the distribution
of affected EAP workers across entities, so it used an average cost per entity.

The Department believes an average of 1 hour per entity is appropriate because
the regulated community is likely to be familiar with the content of this
rulemaking. EAP exemptions have existed in one form or another since 1938, and a
final rule was published as recently as 2019. Furthermore, employers who use the
exemptions must apply them every time they hire an employee whom they seek to
classify as exempt. Thus, employers should be familiar with the exemptions. The
most significant changes in this rulemaking are setting a new standard salary
level and a new HCE compensation level for exempt workers and establishing a
mechanism for keeping these thresholds up to date. The changed regulatory text
is only a few pages, and the Department will provide summaries and other
compliance assistance materials that will help inform employers that are
implementing the final rule. The Department thus believes, consistent with its
approach in the 2016 and 2019 rules, that 1 hour is an appropriate average
estimate for the time each entity will spend reviewing the changes made by this
rulemaking. Additionally, the estimated 1 hour for regulatory familiarization
represents an assumption about the average for all entities in the U.S., even
those without any affected or exempt workers, which are unlikely to spend much
time reviewing the rulemaking. Some businesses, of course, will spend more than
1 hour, and some will spend less.

The Department's analysis assumes that compensation, benefits, and job analysis
specialists (SOC 13-1141) with a median wage of $32.59 per hour will review the
rulemaking.[349 350] The Department also assumed that benefits are paid at a
rate of 45 percent of the base wage [351] and overhead costs are paid at a rate
of 17 percent of the base wage,[352] resulting in an hourly rate of Start
Printed Page 32909 $54.82 in 2023 dollars.[353] The Department thus estimates
regulatory familiarization costs in Year 1 would be $451.6 million ($54.82 per
hour × 1 hour × 8.24 million entities).

The Department also conducted a sensitivity analysis. First, as previously
noted, the Department used the number of establishments rather than the number
of firms, which results in a higher estimate of the regulatory familiarization
cost. Using the number of firms, 6.4 million, would result in a reduced
regulatory familiarization cost estimate of $350.0 million in Year 1.

Some commenters representing employer interests stated that rule familiarization
costs are underestimated. See, e.g., ABC; IEC; Job Creators Network Foundation;
NSBA; SBA Office of Advocacy. For instance, ABC commented that “compliance with
the proposal will not be as simple as reviewing the salary level and making a
one-time decision” and that “82% of recently surveyed ABC members . . .
responded that reviewing the final rule would take three hours or longer, with
47% saying it would take five hours or more.”

While the Department acknowledges that some employers will spend more than an
hour reviewing the rule, the estimate of 1 hour for rule familiarization is an
assumption about the average representing all establishments, even those without
any affected or exempt workers. Those establishments will likely not need to
spend any time reviewing the rule. Employers in industries with more affected
workers may spend more time reviewing the rule, but across all industries, the
Department believes that 1 hour continues to be appropriate. The Department used
the same 1 hour estimate in its 2016 and 2019 rules,[354] and the Department did
not receive comments with concrete data that is representative across all
industries from which to conclude that its average estimate of one hour is
incorrect. The Department continues to believe that businesses are already
familiar with this rulemaking. The EAP exemptions have existed for a long time,
and recent rules were published in 2016 and 2019. This rulemaking sets a new
standard salary level and a new HCE compensation level for exempt workers and
establishes a mechanism for keeping these thresholds up to date. However, this
rulemaking does not fundamentally change the existing method for determining
whether an employee qualifies for the EAP exemption. To the extent commenters'
familiarization cost concerns related to time needed to comply with the rule,
these costs are addressed separately under the Department's managerial and
adjustment cost estimates. As for concerns relating to the hourly wage rate used
to calculate rule familiarization costs, the Department notes that it relies on
the standard occupation used in previous WHD and DOL rulemakings.

III. ADJUSTMENT COSTS

This rulemaking will also impose direct costs on establishments by requiring
them to evaluate the exemption status of employees, update and adapt overtime
policies, notify employees of policy changes, and adjust their payroll systems.
For each affected worker who works overtime, an employer will need to decide
whether they will increase their salary, adjust their hours, or some combination
of the two. The Department believes the size of these “adjustment costs” will
depend on the number of affected EAP workers and will occur in any year when
exemption status is changed for any workers. To estimate adjustment costs, three
pieces of information must be estimated: (1) a wage level for the employees
making the adjustments; (2) the amount of time spent making the adjustments; and
(3) the estimated number of newly affected EAP workers. The Department again
estimated that the average wage with benefits and overhead costs for a mid-level
human resource worker is $54.82 per hour (as explained above).

The Department estimated that it will take establishments an average of 75
minutes per affected worker to make the necessary adjustments. This is the same
time estimate as used in the 2016 and 2019 rulemakings, as well as in the NPRM.
Little applicable data were identified from which to estimate the amount of time
required to make these adjustments. The estimated number of affected EAP workers
in Year 1 due to the change in the standard salary level to $1,128 per week and
the HCE level to $151,164 per year is 4.3 million (as discussed in section
VII.B.7). However, because the compensation thresholds will undergo an initial
update on July 1, 2024 and then an increase using the new methodologies 6 months
later, employers may have additional adjustment costs when the standard salary
level is initially updated to $844 per week and the HCE level is initially
updated to $132,964.

Some employers may make two adjustments for affected workers—one at the initial
update to the standard salary level and then again with the salary level
adjustment 6 months later. To estimate the costs associated with multiple
adjustments, the Department assumed that at the initial update, some employers
could experience additional adjustment costs for the affected workers who will
have their weekly earnings increased to $844 per week. In order to estimate the
number of affected workers who would have their weekly earnings increased to
$844 per week, the Department looked at EAP exempt workers earning at least $684
per week but less than $844 per week. Using the methodology laid out in the
transfer analysis in section VII.C.4.iii, the Department then estimated the
share of these workers who regularly work overtime and would remain exempt,
because it is less expensive for the employer to pay the updated salary level
than to pay overtime (described in that section as Type 4 workers). The
Department estimated that there would be 27,692 workers who earn between $684
and $844 and would have their earnings increased at the initial update. The
Department does not have data to determine how many employers would increase
earnings twice for workers earnings between $684 and $844. For these workers,
unless they are working large numbers of overtime hours, it is likely to be more
economically beneficial for employers to make other changes in response to the
rule instead of increasing their salary to $1,128 a week, such as limiting
overtime hours worked. Despite this, in case there are limited cases in which
workers do have their earnings increased twice, the Department has included
these additional adjustment costs in the total adjustment cost estimate.
Therefore, total estimated Year 1 adjustment costs would be $299.1 million
($54.82 × 1.25 hours × (4,337,469 + 27,692 workers)).

The Department used a time estimate per affected worker, rather than per
establishment, because the distribution of affected workers across
establishments is unknown. However, it may be helpful to present the total time
estimate per establishment based on a range of affected workers. If an
establishment has five affected workers, the time estimate for adjustment costs
is 6.25 hours. If an establishment has 25 affected workers, the time estimate
for adjustment costs is 31.25 hours. And if an establishment has 50 affected
workers, the time estimate for adjustment costs is 62.5 hours.

A reduction in the cost to employers of determining employees' exemption status
may partially offset adjustment costs. Currently, to determine whether Start
Printed Page 32910 an employee is exempt, employers must apply the duties test
to salaried workers who earn $684 or more per week. However, under the final
rule, firms will no longer be required to apply the duties test to the 8.7
million employees earning above the current standard salary level of $684 and
less than the new standard salary level of $1,128. While this will be a clear
cost savings to employers for these employees, the Department did not estimate
the potential size of this cost savings.

Some commenters representing employer interests stated that the Department
underestimated adjustment costs. See, e.g., NAHB; NSBA; PPWO. NAHB, for
instance, stated that “the Department's economic analysis,” including its
estimate of “75 minutes per affected worker for adjustment,” “dramatically
understate[d] the . . . cost burden on employers,” and PPWO stated that
adjustment costs (and regulatory familiarization and managerial costs) were “all
dramatically understated.” SBA Advocacy and Seyfarth Shaw asserted that the
Department underestimated adjustment costs for small businesses, with both
commenters stating that smaller employers would be more likely than larger ones
to hire outside assistance to make needed adjustments. See also NFIB (“The NPRM
underestimates compliance costs for small businesses[.]”). Some commenters
asserted that the Department failed to account for adjustment costs that
employers would need to incur beyond the first year the rule is in effect, such
as costs associated with determining whether an employee remains exempt,
reclassifying newly-exempt employees as hourly, and making other adjustments to
time and attendance systems, given that the earnings thresholds for exemption
will be updated on a triennial basis. See PPWO; The 4As. Additionally, some
commenters expressed particular concern with adjustment costs stemming from the
proposed increase in the HCE compensation level, noting that for workers who
were previously exempt under the HCE test but earn below the proposed HCE
compensation level, employers would need to evaluate the worker's duties to
determine whether they remain exempt under the standard test. See, e.g., HR
Policy Association; NAM; PPWO. NAM stated that “[a]cross the manufacturing
sector, the change in the HCE threshold may be as difficult and consequential as
the proposed increases to the standard salary threshold.”

The Department is retaining its estimate of adjustment costs as 75 minutes per
affected worker in the final rule. This estimate is consistent with the
Department's estimate in the 2016 and 2019 rules.[355] The Department notes that
the 75-minute-per-worker average time estimate is an assumption about the
average across all workers, and it believes this estimate takes into account
adjustment time for workers affected by the new standard salary level and the
smaller portion of workers affected by the new HCE total compensation threshold.
This estimate assumes that the time is focused on analyzing more complicated
situations. For example, employers are likely to incur relatively low adjustment
costs for some workers, such as the 69 percent of affected workers who work no
overtime (described below as Type 1 workers). This leaves more time for
employers to spend on adjustment costs for the 31 percent of affected workers
who work overtime either occasionally or regularly. To demonstrate, if the
aggregate time spent on adjustments (75 min × 4.37 million workers) was spread
out over only workers who work overtime, then the time estimate is 4.0 hours per
worker. Lastly, the Department did not receive any comments with data providing
a different estimate for the Department to rely on.

Contrary to commenters that stated that the Department failed to take into
account adjustment costs beyond the first year the rule is in effect, the
Department's estimated adjustment costs include costs in all years for newly
affected workers. The Department limits adjustment costs in projected years to
newly affected workers because there is no need to “adjust” for workers who are
already overtime eligible (due to a prior adjustment of the salary level) when
the salary level is updated again. Table 26 provides adjustment (and other) cost
projections in future years due to the updating mechanism.

IV. MANAGERIAL COSTS

If an employee becomes nonexempt due to the changes in the salary levels, then
firms may incur ongoing managerial costs because the employer may spend more
time developing work schedules and closely monitoring an employee's hours to
minimize or avoid paying that employee overtime. For example, the manager of a
newly nonexempt worker may have to assess whether the marginal benefit of
scheduling the worker for more than 40 hours exceeds the marginal cost of paying
the overtime premium. Additionally, the manager may have to spend more time
monitoring the employee's work and productivity since the marginal cost of
employing the worker per hour has increased. Unlike regulatory familiarization
and adjustment costs, which occur primarily in Year 1, managerial costs are
incurred more uniformly every year.

The Department applied managerial costs to workers who (1) become nonexempt,
overtime-protected and (2) either regularly work overtime or occasionally work
overtime, but on a predictable basis—an estimated 911,000 workers ( see Table 13
and accompanying explanation). Consistent with its approach in its 2019 rule and
the NPRM, the Department assumed that management would spend an additional ten
minutes per week scheduling and monitoring each affected worker expected to
become nonexempt, overtime-eligible as a result of this rule, and whose hours
would be adjusted.

As discussed in detail below, most affected workers do not currently work
overtime, and there is no reason to expect their hours worked to change when
their status changes from exempt to nonexempt. For that group of workers,
management will have little or no need to increase their monitoring of hours
worked; therefore, these workers are not included in the managerial cost
calculation. Under these assumptions, the additional managerial hours worked per
week will be 151,800 hours ((10 minutes ÷ 60 minutes) × 911,000 workers).

The median hourly wage in 2022 for a manager was $51.62.[356] Together with a 45
percent benefits rate and a 17 percent overhead cost, this totals $86.82 per
hour in 2023 dollars.[357] Thus, the estimated Year 1 managerial costs total
$685.5 million (151,835 hours per week × 52 weeks [358] × $86.82/hour). Although
Start Printed Page 32911 the exact magnitude will vary each year with the number
of affected EAP workers, the Department anticipates that employers would incur
managerial costs annually.

Some commenters expressed concerns that the regulation will increase managerial
costs, with some specifically asserting that the Department's estimate was too
low, see, e.g., PPWO, SBA Advocacy, NCFC, IEC. Commenter concerns with
managerial costs were often tied to the additional costs they asserted would
result from tracking the work hours of newly nonexempt employees. See, e.g., 16
Republication Representatives; APLU. Commenters specifically asserted tracking
hours of currently exempt employees would increase human resources paperwork and
technology costs for their companies. See, e.g., The Chamber of Commerce for
Greater Philadelphia; John C. Campbell Folk School.

The Department continues to believe that 10 minutes per worker per week is an
appropriate managerial cost estimate. Currently, EAP exempt employees account
for about 24 percent of total employment; as such, the Department expects that
many employers of EAP exempt workers also employ nonexempt workers. Those
employers already have in place recordkeeping systems and standard operating
procedures for ensuring employees only work overtime under employer-prescribed
circumstances. Thus, such systems generally do not need to be created or
acquired for managing formerly exempt EAP employees. The Department also notes
that under the FLSA recordkeeping regulations in part 516, employers determine
how to make and keep an accurate record of hours worked by employees. For
example, employers may tell their workers to write their own time records and
any timekeeping plan is acceptable if it is complete and accurate. Additionally,
if the nonexempt employee works a fixed schedule, e.g., 9:00 a.m.-5:30 p.m.
Monday-Friday, the employer may keep a record showing the exact schedule of
daily and weekly hours and merely indicate exceptions to that schedule.[359] The
Department believes its estimate, which tracks the approach taken in its 2019
rule, accurately predicts management costs, including costs firms may incur for
monitoring and managing the hours of formerly exempt employees.

V. OTHER POTENTIAL COSTS

In addition to the costs discussed above, commenters raised other potential
costs that could not be quantified. These potential costs are discussed
qualitatively below.

(A) REDUCED SCHEDULING FLEXIBILITY

Several commenters claim that this rule would restrict employee workplace
flexibility, such as remote work and flexible scheduling. See, e.g., HR Policy
Association; NAM; NRF; SBA; Chamber. For example, the Chamber stated, “workers
will lose their ability to work from home and the flexibility that they have
enjoyed in salaried positions, particularly since the COVID-19 pandemic changed
the face of the American workplace in 2020.” However, commenters did not provide
any specific evidence to support this claim. The Department notes that even
those workers that are paid on an hourly basis can still take advantage of
workplace flexibilities such as remote work. According to the CPS data, of all
workers who reported working at home any time in the past week, 74.2 percent of
them were categorized as hourly workers.

To the extent that some employers spend more time monitoring nonexempt workers'
hours than exempt workers' hours, some employers could respond to this rule by
limiting the ability of newly nonexempt workers to adjust their schedules.
However, employers can continue to offer flexible schedules and require workers
to monitor their own hours and to follow the employers' timekeeping rules.
Additionally, some exempt workers already monitor their hours for billing
purposes and so monitoring their hours as newly nonexempt workers should not be
unduly burdensome. A study by Lonnie Golden found, using data from the General
Social Survey (GSS), that “[i]n general, salaried workers at the lower (less
than $50,000) income levels don't have noticeably greater levels of work
flexibility that they would `lose' if they become more like their hourly
counterparts.” [360] Because there is little data or literature on these
potential costs, the Department did not quantify potential costs regarding
scheduling flexibility.

Organizations such as the American Beverage Licensees and educational
institutions in CUPA-HR and APLU, also asserted that the rule would reduce
employer flexibility to allocate work hours based on schedules that include
non-traditional work hours. The Hinton Rural Life Center said that the rule
would make it financially unfeasible for nonexempt employees to attend specific
activities such as “overnight training sessions or marketing events.” NCFC
stated that because of the increased attention that must be paid to the hours
worked by nonexempt employees, they are likely to be at a competitive
disadvantage with exempt employees in the same role. Under this assumption, they
asserted that “many training opportunities” would now require additional
compensation if “those opportunities would put the nonexempt employee into an
overtime situation,” and therefore “access to those opportunities may be
limited” for nonexempt employees. The Department notes that if an employer
believes that training opportunities are sufficiently important, it can ensure
employees attend the trainings during their 40-hour workweek or pay the overtime
premium where training attendance causes the employee to work over 40 hours in a
workweek. Given this, and because there is no data and literature to quantify
any potential costs to workers, the Department did not quantify these costs.

(B) PREFERENCE FOR SALARIED STATUS

Many commenters contended that the employers of some of the workers who will
become nonexempt as a result of the rule could change their pay basis to hourly
status despite the employee preferring to remain salaried. See, e.g., AHLA;
NSBA; SIGMA. Some commenters, such as SIGMA, stated that conversion of employees
to hourly status that will negatively affect morale, as employees may perceive
the change as a demotion or a loss of status because of, among other reasons,
the lost flexibility associated with salaried status. Conversely, commenters
such as the Coalition of State AGs and the Family Caregiving Coalition asserted
that the proposed rule would increase employee satisfaction and retention,
improve work-life balance, reduce stress and health problems, and make jobs more
attractive to qualified applicants primarily because employees will now be
compensated for hours worked beyond a standard workweek. Notably, a strong
majority of the individual commenters who said they would be personally affected
by the proposed rule expressed support for the rule.

If a worker does prefer to be salaried rather than hourly, then the employer
changing them from salaried to hourly may impact the worker. However, the
Department believes that for most Start Printed Page 32912 employees their
feelings of importance and worth come not from their FLSA exemption status, but
from the increased pay, flexibility, fringe benefits, and job responsibilities
that traditionally have accompanied exempt status, and that these factors are
not incompatible with overtime eligibility. And while research has shown that
salaried workers (who are not synonymous with exempt workers, but whose status
is correlated with exempt status) are more likely than hourly workers to receive
certain benefits, as discussed below, such research generally does not control
for differences between salaried and hourly workers such as education, job
title, or earnings.

Several commenters stated that in response to the proposed salary level
employers would likely decrease employee benefits. See, e.g., PPWO; Rachel
Greszler. These and similar comments were mostly general statements, often
listing types of benefits employees may lose. Others stated that employees would
lose benefits due to being reclassified as hourly workers. See, e.g.,
Independent Women's Forum (IWF); NRF. Some commenters stated that these
employees would have reductions in their ability to earn bonuses or other types
of incentive payments, but these commenters generally did not discuss the net
impact on these employees' earnings. See, e.g., NRF. These comments did not
provide information that would allow the Department to estimate the purported
impact of the final rule on employee benefits.

Research has shown that salaried workers are more likely than hourly workers to
receive benefits such as paid vacation time and health insurance [361] and are
more satisfied with their benefits.[362] However, this literature generally does
not control for differences between salaried and hourly workers such as
education, job title, or earnings; therefore, this correlation is not
necessarily attributable to hourly status.

If workers become nonexempt and the employer chooses to pay them on an hourly
rather than salary basis, this may result in the employer reducing the workers'
benefits. These newly nonexempt workers may continue to be paid a salary, as
long as that salary is equivalent to a base wage at least equal to the minimum
wage rate for every hour worked, and the employee receives a 50 percent premium
on that employee's regular rate for any overtime hours each week.[363]
Similarly, employers may continue to provide these workers with the same level
of benefits as before, whether paid on an hourly or salary basis. Lastly, the
nature of the market mechanism may be such that employers cannot reduce benefits
without risking workers leaving, resulting in turnover costs to employers. The
Department did not quantify potential costs regarding reduction in workers'
benefits.

(D) INCREASED PRICES

Several commenters such as AAHOA, the Chamber, CUPA-HR, Indiana Chamber of
Commerce, NAHB, and the National Association of Wholesaler-Distributors stated
that the regulation will result in increased prices due to increased employee
salaries and other costs to employers. Some of these commenters assert that
employers increasing their workers' salaries to maintain their exempt status
would induce a general price increase if anticipated wage increases do not
result in productivity increases. See, e.g., Chamber; NAW. NAHB conducted a
survey among its members about the proposal, and 50 percent of survey
respondents stated that finalizing the salary level as proposed would lead them
to raise home prices, while 25 percent of respondents stated that the change
would make some projects unprofitable.

The Department acknowledges that, as discussed in the transfers section below,
businesses may be able to help mitigate increased labor costs following this
rulemaking by rebalancing the hours that employees are working. Businesses that
are unable to rebalance these hours and do incur increased labor costs might
pass along these increased labor costs to consumers through higher prices for
goods and services. However, because costs and transfers will be, on average,
small relative to payroll and revenues, the Department does not expect the rule
to have a significant effect on prices. The Department estimated that, on
average, costs and transfers make up less than 0.04 percent of payroll and 0.006
percent of revenues, although for specific industries and firms this percentage
may be larger ( see Table 24). Therefore, any potential change in prices related
to costs and transfers from this rulemaking would be modest, and the Department
notes that commenter predictions (such as those in the NAHB survey described
above) reflect speculation about what will occur in the future and thus may not
reflect actual economic responses by employers. Further, any significant price
increases would not represent a separate category of effects from those
estimated in this economic analysis. Rather, such price increases (where they
occur) would be the channel through which consumers, rather than employers or
employees, bear rule-induced costs (including transfers).

While economic theory suggests that an increase in labor costs in excess of
productivity gains would lead to increases in prices, much of the empirical
literature has found that wage inflation does not predict price inflation.[364]
For example, Peneva et al. (2015) explore the relationship between labor costs
and price inflation between 1965 and 2012, finding that the influence of labor
costs on prices has decreased over the past several decades and have made a
relatively small contribution to price inflation in recent years.[365]

(E) REDUCED SERVICES

Some commenters expressed concern that, by reducing the number of exempt
employees, this rulemaking will negatively impact the amount or quality of
services that employers can provide. See, e.g., ANCOR; Boy Scouts of America;
Catholic Charities USA; YMCA. The National Association of Counties raised
similar concerns with respect to county governments. A number of colleges,
universities, and other higher-education stakeholders, such as APLU and CUPA-HR,
similarly asserted that the proposed rule would negatively affect support
services for students. The Department appreciates that employers in some
industries have Start Printed Page 32913 less flexibility than others to account
for new labor costs and that the services provided by such employers could be
negatively affected. However, the Department believes the effect of the rule on
public services will be small. The Department acknowledges that some newly
nonexempt employees who currently work overtime providing public services may
see a reduction in hours as an effect of the rulemaking. But if the services are
in demand, the Department believes additional workers may be hired, as funding
availability allows, to make up some of these hours, and productivity increases
may offset some reduction in services. In addition, the Department expects some
employers will adjust base wages downward to some degree so that even after
paying the overtime premium, overall pay and hours of work for many employees
will be relatively minimally impacted. Additionally, many nonprofits are
noncovered enterprises because when determining enterprise coverage only revenue
derived from business operations, not charitable activities, is included.

(F) REDUCED PROFITS

Some commenters asserted that the rule would lead to decreased profits. See
e.g., Quad Cities Chamber of Commerce, ESEI, DT-Trak Consulting. The Department
acknowledges that the increased employer costs and transfer payments as a result
of this rule may reduce the profits of business firms, although (1) some firms
may offset some of these costs and transfers by making payroll adjustments, and
(2) some firms may mitigate their reduced profits due to these costs and
transfers through increased prices. Because costs and transfers are, on average,
small relative to payroll revenues, the Department does not expect this
rulemaking to have a significant effect on profits.

(G) HIRING COSTS

To the extent that firms respond to this rule by reducing overtime hours, they
may do so by spreading hours to other workers, including current workers
employed for fewer than 40 hours per week by that employer, current workers who
remain exempt, and newly hired workers. If new workers are hired to absorb these
transferred hours, then the associated hiring costs would be a cost of this
rule. (However, new employees would likely only be hired if their wages,
onboarding costs, and training costs are less than the cost of overtime pay for
the newly nonexempt workers.) The Department does not know how many new
employees would be hired and thus did not estimate this cost.

(H) HOURS-RELATED WORKER EFFECTS

Some employer representatives highlighted the possibility that some workers
might work more hours as a consequence of this rulemaking. For example,
Construction Industry Roundtable commented that employers responding to the
increased salary level might “require the remaining exempt employees to absorb
some of the duties of the newly non-exempt employees—which would be viewed as an
unfair burden by the remaining exempt employees who are at or near capacity
already.” See also SIGMA (providing similar statements).

The Department acknowledges that for some affected workers, if their employers
respond to the rule by increasing their salary to keep their exemption status,
the change may also be accompanied by an increase in assigned hours.
Additionally, some employers might respond to this regulation by reducing the
overtime hours of affected workers and transferring those hours to other workers
who remain exempt. The Department believes that while some workers may see an
increase in hours, others may see their hours decline (discussed further in the
Benefits section below).

(I) WAGE COMPRESSION

Some commenters contended that the update to the salary threshold in this rule
would lead to wage compression. For example, PPWO stated that the Department did
not account for this potential cost, stating, “Where employees below the
proposed salary minimum have their salaries raised to meet the new minimum,
employees above the new minimum will likewise need to have their salaries raised
to account for the relative value of the work being performed.” See also, e.g.,
Seyfarth Shaw.

However, as discussed in section VII.C.4.iii.f., the Department estimates that
only 2.2 percent of affected workers will have their earnings increased to the
updated salary level. Thus, in the overwhelming majority of cases wage
compression concerns should not arise. The Department recognizes that there may
be some cases in which employers that raise the pay of affected employees to the
new salary level will also choose to increase the earnings of more highly paid
employees to avoid wage compression, but the Department does not have data to
estimate this impact.

4. TRANSFERS

I. OVERVIEW

Transfer payments occur when income is redistributed from one party to another.
The Department has quantified two transfers from employers to employees that
will result from the rule: (1) transfers to ensure compliance with the FLSA
minimum wage provision; and (2) transfers to ensure compliance with the FLSA
overtime pay provision. Transfers in Year 1 due to the minimum wage provision
were estimated to be $87.5 million. The increase in the HCE compensation level
does not affect minimum wage transfers because workers eligible for the HCE
exemption earn well above the minimum wage. The Department estimates that
transfers due to the applicability of the FLSA's overtime pay provision will be
$1.4 billion: $1.2 billion from the increased standard salary level and $255.6
million from the increased HCE compensation level. Total Year 1 transfers are
estimated at $1.5 billion (Table 10).

TABLE 10—TOTAL ANNUAL CHANGE IN EARNINGS FOR AFFECTED EAP WORKERS BY PROVISION,
YEAR 1 (MILLIONS)

Start Printed Page 32914

Because the overtime premium depends on the employee's regular rate of pay, the
estimates of minimum wage transfers and overtime transfers are linked. This can
be considered a two-step approach. The Department first identified affected EAP
workers with an implicit regular hourly wage lower than the minimum wage, and
then calculated the wage increase necessary to reach the minimum wage. Then, the
Department estimated overtime payments.

II. TRANSFERS DUE TO THE MINIMUM WAGE PROVISION

For this analysis, the hourly rate of pay was calculated as usual weekly
earnings divided by usual weekly hours worked. To earn less than the Federal or
most state minimum wages, this set of workers must work many hours per week. For
example, a worker paid $684 per week must work 94.3 hours per week to earn less
than the Federal minimum wage of $7.25 per hour ($684 ÷ $7.25 = 94.3).[366] The
applicable minimum wage is the higher of the Federal minimum wage and the state
minimum wage as of January 1, 2023. Most affected EAP workers already receive at
least the minimum wage; only an estimated 0.5 percent (19,900 in total) earn an
implicit hourly rate of pay less than the Federal minimum wage. The Department
estimated transfers due to payment of the minimum wage by calculating the change
in earnings if wages rose to the minimum wage for workers who become
nonexempt.[367]

In response to an increase in the regular rate of pay to the minimum wage,
employers may reduce the workers' hours. In theory, since the quantity of labor
hours demanded is inversely related to wages, a higher mandated wage would, all
things being equal, result in fewer hours of labor demanded. However, the weight
of the empirical evidence finds that increases in the minimum wage that are
similar in magnitude to what would be caused by this regulatory provision have
caused little or no significant job loss.[368] Thus, in the case of this
regulation, the Department believes that any disemployment effect due to the
minimum wage provision will be negligible. This is partially due to the small
number of workers affected by this provision. According to the Wolfson and
Belman (2016) meta-analysis cited above, the consensus range for labor demand
elasticity was −0.05 to −0.12. However for Year 1 of this analysis, the
Department estimated the potential disemployment effects ( i.e., the estimated
reduction in hours) of the transfer attributed to the minimum wage by
multiplying the percent change in the regular rate of pay by a labor demand
elasticity of −0.2 (years 2-10 use a long run elasticity of −0.4).[369 370] The
Department chose this labor demand elasticity because it was used in the 2019
final rule and is consistent with the labor demand elasticity estimates used
when estimating other transfers further below.

At the new standard salary level, the Department estimated that 19,900 affected
EAP workers will, on average, see an hourly wage increase of $1.57, work 2.1
fewer hours per week and receive an increase in weekly earnings of $84.73 as a
result of coverage by the minimum wage provisions (Table 11). The total change
in weekly earnings due to the payment of the minimum wage was estimated to be
$1.7 million per week ($84.73 × 19,900) or $87.5 million in Year 1.

TABLE 11—MINIMUM WAGE ONLY: MEAN HOURLY WAGES, USUAL WEEKLY HOURS AND WEEKLY
EARNINGS FOR AFFECTED EAP WORKERS, YEAR 1

III. TRANSFERS DUE TO THE OVERTIME PAY PROVISION

(A) INTRODUCTION

The FLSA requires covered employers to pay an overtime premium to nonexempt
covered workers who work in excess of 40 hours per week. For workers who become
nonexempt, the rulemaking will result in a transfer of income to the affected
workers, increasing the marginal cost of labor, which employers may try to
offset by adjusting the wages and/or hours of affected workers. The size of the
transfer will depend largely on how employers choose to respond to the updated
salary levels. Employers may respond by: (1) paying overtime premiums to
affected workers; (2) reducing overtime hours of affected workers and
potentially transferring some of these hours to other workers; (3) reducing the
regular rate of pay for affected workers working Start Printed Page 32915
overtime (provided that the reduced rates still exceed the minimum wage); (4)
increasing affected workers' salaries to the updated salary or compensation
level to preserve their exempt status; or (5) using some combination of these
responses. How employers will respond depends on many factors, including the
relative costs of each of these alternatives. In turn, the relative costs of
each of these alternatives are a function of workers' earnings and hours worked.

(B) LITERATURE ON EMPLOYER ADJUSTMENTS

Two conceptual models are useful for thinking about how employers may respond to
when certain employees become eligible for overtime: (1) the “fixed-wage” or
“labor demand” model, and (2) the “fixed-job” or “employment contract”
model.[371] These models make different assumptions about the demand for
overtime hours and the structure of the employment agreement, which result in
different implications for predicting employer responses.

The fixed-wage model assumes that the standard hourly wage is independent of the
statutory overtime premium. Under the fixed-wage model, a transition of workers
from overtime exempt to overtime nonexempt would cause a reduction in overtime
hours for affected workers, an increase in the prevalence of a 40-hour workweek
among affected workers, and an increase in the earnings of affected workers who
continue to work overtime.

In contrast, the fixed-job model assumes that the standard hourly wage is
affected by the statutory overtime premium. Thus, employers can neutralize any
transition of workers from overtime exempt to overtime nonexempt by reducing the
standard hourly wage of affected workers so that their weekly earnings and hours
worked are unchanged, except when minimum wage laws prevent employers from
lowering the standard hourly wage below the minimum wage. Under the fixed-job
model, a transition of workers from overtime exempt to overtime nonexempt would
have different effects on minimum-wage workers and above-minimum-wage workers.
Similar to the fixed-wage model, minimum-wage workers would experience a
reduction in overtime hours, an increase in the prevalence of a 40-hour workweek
at a given employer (though not necessarily overall), and an increase in
earnings for the portion of minimum-wage workers who continue to work overtime
for a given employer. Unlike the fixed-wage model, however, above-minimum-wage
workers would experience no change.

The Department conducted a literature review to evaluate studies of how labor
markets adjust to a change in the requirement to pay overtime. These studies are
generally supportive of the fixed-job model of labor market adjustment, in that
wages adjust to offset the requirement to pay an overtime premium as predicted
by the fixed-job model, but do not adjust enough to completely offset the
overtime premium as predicted by the model.

As in the 2016 and 2019 rules, the Department believes the two most important
papers in this literature are the studies by Trejo (1991) and Barkume (2010).
Analyzing the economic effects of the overtime pay provisions of the FLSA, Trejo
(1991) found “the data analyzed here suggest the wage adjustments occur to
mitigate the purely demand-driven effects predicted by the fixed-wage model, but
these adjustments are not large enough to neutralize the overtime pay
regulations completely.” Trejo noted, “In accordance with the fixed job model,
the overtime law appears to have a greater impact on minimum-wage workers.” He
also stated, “[T]he finding that overtime-pay coverage status systematically
influences the hours-of-work distribution for nonminimum-wage workers is
supportive of the fixed-wage model. No significant differences in weekly
earnings were discovered between the covered and non-covered sectors, which is
consistent with the fixed-job model.” However, “overtime pay compliance is
higher for union than for nonunion workers, a result that is more easily
reconciled with the fixed wage model.” Trejo's findings are supportive of the
fixed-wage model whose adjustment is incomplete largely due to the minimum-wage
requirement.[372]

A second paper by Trejo (2003) took a different approach to testing the
consistency of the fixed-wage adjustment models with overtime coverage and data
on hours worked.[373] In this paper, he examined time-series data on employee
hours by industry. After controlling for underlying trends in hours worked over
20 years, he found changes in overtime coverage had no impact on the prevalence
of overtime hours worked. This result supports the fixed-job model. Unlike the
1991 paper, however, he did not examine impacts of overtime coverage on
employees' weekly or hourly earnings, so this finding in support of the
fixed-job model only analyzes one implication of the model.

Barkume (2010) built on the analytic method used in Trejo (1991).[374] However,
Barkume observed that Trejo did not account for “quasi-fixed” employment costs (
e.g., benefits) that do not vary with hours worked, and therefore affect
employers' decisions on overtime hours worked. After incorporating these
quasi-fixed costs in the model, Barkume found results consistent with those of
Trejo (1991): “though wage rates in otherwise similar jobs declined with greater
overtime hours, they were not enough to prevent the FLSA overtime provisions
from increasing labor costs.” Barkume also determined that the 1991 model did
not account for evidence that in the absence of regulation some employers may
voluntarily pay workers some overtime premium to entice them to work longer
hours, to compensate workers for unexpected changes in their schedules, or as a
result of collective bargaining. Barkume found that how much wages and hours
worked adjusted in response to the overtime pay requirement depended on what
overtime pay would be in absence of regulation.

In addition, Bell and Hart (2003) examined the standard hourly wage, average
hourly earnings (including overtime), the overtime premium, and overtime hours
worked in Britain.[375] Unlike the United States, Britain does not have national
labor laws regulating overtime compensation. Bell and Hart found that after
accounting for overtime, average hourly earnings are generally uniform in an
industry because firms paying below-market level straight-time wages tend to pay
above-market overtime premiums and firms paying above-market level straight-time
wages tend to pay below-market overtime premiums. Bell and Hart concluded “this
is consistent with a model in which workers and firms enter into an implicit
contract that specifies total hours at a constant, market-determined, hourly
wage rate. Their research is also consistent with studies showing that employers
may pay overtime premiums either in the absence of a regulatory Start Printed
Page 32916 mandate ( e.g., Britain), or when the mandate exists but the
requirements are not met ( e.g., United States).[376]

On balance, consistent with its 2016 and 2019 rulemakings, the Department finds
strong support for the fixed-job model as the best approximation for the likely
effects of a transition of above-minimum-wage workers from overtime exempt to
overtime nonexempt and the fixed-wage model as the best approximation of the
likely effects of a transition of minimum-wage workers from overtime exempt to
overtime nonexempt. In addition, the studies suggest that although observed wage
adjustment patterns are consistent with the fixed-job model, this evidence also
suggests that the actual wage adjustment might, especially in the short run, be
less than 100 percent as predicted by the fixed-job model. Thus, the hybrid
model used in this analysis may be described as an incomplete fixed-job
adjustment model.

To determine the magnitude of the adjustment, the Department accounted for the
following findings. Earlier research had demonstrated that in the absence of
regulation some employers may voluntarily pay workers some overtime premium to
entice them to work longer hours, to compensate workers for unexpected changes
in their schedules, or as a result of collective bargaining.[377] Barkume (2010)
found that the measured adjustment of wages and hours to overtime premium
requirements depended on what overtime premium might be paid in absence of any
requirement to do so. Thus, when Barkume assumed that workers would receive an
average voluntary overtime pay premium of 28 percent in the absence of an
overtime pay regulation, which is the average overtime premium that Bell and
Hart (2003) found British employers paid in the absence of any overtime
regulations, the straight-time hourly wage adjusted downward by 80 percent of
the amount that would occur with the fixed-job model.[378] When Barkume assumed
workers would receive no voluntary overtime pay premium in the absence of an
overtime pay regulation, the results were more consistent with Trejo's (1991)
findings that the adjustment was a smaller percentage. The Department modeled an
adjustment process between these two findings. Although it seemed reasonable
that some premium was paid for overtime in the absence of regulation, Barkume's
assumption of a 28 percent initial overtime premium is likely too high for the
salaried workers potentially affected by a change in the salary and compensation
level requirements for the EAP exemptions because this assumption is based on a
study of workers in Britain. British workers were likely paid a larger voluntary
overtime premium than American workers because Britain did not have a required
overtime pay regulation and so collective bargaining played a larger role in
implementing overtime pay.[379] In the sections that follow, the Department uses
a method between these two papers to model transfers.

Many commenters representing employer interests indicated that employers would
respond to the changes proposed in the NPRM by making a variety of adjustments
to wages, hours worked, or both. Some commenters responded with results from
surveys of their constituents. Although these surveys may be helpful as
background information, they generally cannot be used in a quantitative analysis
due to issues such as insufficient or uncertain sample sizes, missing sampling
methodology, and missing magnitudes. For example, NAHB referenced results from a
survey of an unknown number of its members, asserting that 38 percent of
respondents indicated they would respond to the proposed increase in the salary
level by “[m]inimiz[ing] overtime hours.” The Department agrees that firms may
reduce the hours of some workers and has included this in the quantitative
analysis below; however, the modeling question is to what degree employers will
adjust hours.[380] As discussed below, the Department estimates that employers
will reduce hours for Type 2B and Type 3 workers, which together make up 21% of
all affected workers. The Department's model is based on worker-specific
adjustments and does not assume that a firm would respond the same way for all
affected workers that they employ. Moreover, such surveys were often
sector-specific, making it difficult to extrapolate economy-wide trends, because
the distribution of affected workers varies across sectors. Also, these surveys
were often based not on actual economic responses, but rather on expressions of
intentions. See, e.g., AHLA; ANCOR; NAIS and NBOA; NDA.

Despite the inability to incorporate these survey results into the analysis,
select results are presented here. For instance, according to AHLA, of the
members it surveyed, “70% anticipat[ed] reclassifying workers, 60% anticipat[ed]
reducing hours and career development opportunities to reduce potential overtime
costs, and 51% anticipat[ed] position consolidation.” ANCOR found that
“approximately 61 percent of [its constituents] would employ a mitigation
strategy of converting currently exempt salaried workers to hourly workers,”
“[f]ifty-six percent . . . would increase the salary of full-time exempt workers
to meet the projected threshold,” “49 percent . . . would prohibit or
significantly restrict” permitted overtime, and “33 percent indicated the
necessity of reducing salaried full-time employees.” NAIS and NBOA stated that
13 percent of schools that responded to its survey said they would “raise
salaries of those exempt employees who do not meet the new threshold,” 27
percent said they would “convert employees to non-exempt and limit hours where
possible,” 11 percent said they would “convert employees to non-exempt and pay
overtime if hours worked are over 40 in a week” and “47% of schools said they
will enact some combination of the available options.” NAHB stated that, if the
proposed salary threshold were implemented, 38 percent of respondents reported
they would “[m]inimize overtime hours,” as noted above; 24 percent would
“[r]aise salaries above the threshold”; and 9 percent would “[r]educe salaries
to compensate for overtime” (among other changes). And NDA stated that 66
percent of respondents “said they would have to reclassify exempt employees as
hourly employees and restructure jobs if DOL raised the minimum salary
threshold” as proposed in the NPRM.

Regarding the transfer calculations in the NPRM, SBA Advocacy expressed concern
about the Department's Start Printed Page 32917 estimates that affected small
business establishments would have, on average, $360 to $2,683 in additional
payroll costs in the first year of the proposed rule. SBA Advocacy stated that
“an Arkansas restaurant with four locations stated it would cost almost $200,000
to increase manager salaries to make them compliant,” and that “small amusement
businesses reported estimated salary increases for their businesses” ranging
from $57,000 to $250,000. It also provided hypothetical examples of potential
salary increases that restaurants in two states would need to make to comply
with the proposed rule based on various assumptions, including different
salaries and amounts of overtime performed. These anecdotal reports and
hypothetical examples do not have any information on the actual amount of
overtime work being performed by newly nonexempt workers at these businesses.
The Department expects that businesses that would be faced with large increases
in payroll costs if they were to increase salaries to the new threshold would
instead find other responses more economically beneficial, such as limiting the
number of overtime hours worked by workers who become nonexempt or paying such
workers the overtime premium for hours in excess of 40 per week. Furthermore,
this comment does not explain what methodological approach the Department should
use to estimate transfers; what error(s), if any, the Department made in its
transfer estimate in its NPRM; or how much the Department underestimated such
transfers.

Some commenters indicated that employers may follow the fixed-job model rather
than the incomplete fixed-job model used by the Department in the NPRM. See,
e.g., AFPI; Americans for Prosperity. AFPI, for instance, stated that
“[r]esearch shows employers primarily respond to expanded overtime eligibility
by reducing base earnings to reflect expected overtime—leaving total earnings
unchanged.” Americans for Prosperity similarly asserted that “[o]ver time, the
natural response of business enterprises of all types to the higher wage costs
occasioned by the proposed rule will be an adjustment in base pay and fringe
benefits lower so that total compensation (base pay, benefits, overtime) does
not rise.” [381]

The Oxford Economics report included with NRF's comment pointed to a study by
Quach (2022),[382] which analyzed the effects of the rescinded 2016 rule and the
2019 rule, along with the impact of state-level increases to the overtime
exemption threshold. According to Oxford Economics, “Quach finds evidence that
overtime coverage decreases employment and increases earnings polarization” and
“strong evidence of employee reclassifications from salaried to hourly
status[.]” The Department notes that the revised 2024 version of the working
paper did not find that increasing overtime exemption thresholds decreases
employment. In fact, when summarizing his findings, he says, “I estimate that
expansions in overtime coverage actually have little effect on employment.” He
also notes, “while the DOL accurately predicted that average weekly earnings
would rise, they calculated an income effect of only 0.7%, whereas I show that
earnings increased by nearly twice that amount for salaried workers.” While the
Department also reviewed the 2022 study, as discussed further below, it has not
incorporated this study into its analysis as it has multiple limitations,
including a reliance on a non-representative selection of employers, which makes
it inappropriate as a model of aggregate effects across the economy. The Oxford
Economics report also claimed that the Department's analysis in the NPRM
demonstrated “a tendency to assume that which workers are paid on a salaried
basis is determined by an exogenous occupational structure and to ignore the
role that the DOL's overtime regulations themselves play in determining this.”

The Department's review of the literature cited above supports a result between
the fixed-job model and the fixed-wage model and thus the results were modeled
accordingly. Specifically, the Department believes the incomplete fixed-job
model is most appropriate and consistent with the literature. Therefore, the
analysis has not been changed. The Department further notes that its estimates
of transfers are informed by its projection that employers will respond to the
final rule in many ways. If, for example, an employer simply pays each affected
employee the overtime premium for each hour worked in excess of 40 hours per
week, without making any adjustments to wages, hours, or duties, such an
approach would maximize transfers from employers to employees. However, as
discussed above, the Department believes that employers will respond to the
final rule by adjusting wages, hours, and duties to minimize the cost of the
rule. Accordingly, the actual amount of transfers will fall well short of the
transfers that would result if employers simply paid each affected employee
overtime premiums without adjusting wages, hours, or duties.

(D) IDENTIFYING TYPES OF AFFECTED WORKERS

The Department identified four types of workers whose work characteristics
affect how it modeled employers' responses to the changes in both the standard
salary level and HCE compensation level:

• Type 1: Workers who do not work overtime.

• Type 2: Workers who do not regularly work overtime but occasionally work
overtime.

• Type 3: Workers who regularly work overtime and become overtime eligible
(nonexempt).

• Type 4: Workers who regularly work overtime and remain exempt, because it is
less expensive for the employer to pay the updated salary level than to pay
overtime and incur additional managerial costs.

The Department began by identifying the number of workers in each type. After
modeling employer adjustments, it estimated transfer payments. Type 3 and Type 4
workers were identified as those who regularly work overtime (CPS variable
PEHRUSL1 greater than 40). To distinguish Type 3 workers from Type 4 workers,
the Department first estimated each worker's weekly earnings if they became
nonexempt, to which it added weekly managerial costs for each affected worker of
$14.47 ($86.82 per hour × (10 minutes ÷ 60 minutes)).[383] Then, the Department
identified as Type 4 those workers whose expected nonexempt earnings plus weekly
managerial costs exceeds the updated standard salary level, and, conversely, as
Type 3 those whose expected nonexempt earnings plus Start Printed Page 32918
weekly managerial costs are less than the new standard salary. The Department
assumed that firms will include incremental managerial costs in their
determination of whether to treat an affected employee as a Type 3 or Type 4
worker because those costs are only incurred if the employee is a Type 3 worker.

Identifying Type 2 workers involved two steps. First, using CPS MORG data, the
Department identified those who do not usually work overtime but did work
overtime in the survey week (the week referred to in the CPS questionnaire,
variable PEHRACT1 greater than 40). Next, the Department supplemented the CPS
data with data from the Survey of Income and Program Participation (SIPP) to
look at likelihood of working some overtime during the year. Based on 2021 data,
the most recent available, the Department found that 31.3 percent of non-hourly
workers worked overtime at some point in a year. Therefore, the Department
classified a share of workers who reported they do not usually work overtime,
and did not work overtime in the reference week, as Type 2 workers such that a
total of approximately 31.3 percent of affected workers were Type 2, 3, or 4.
Type 2 workers are subdivided into Types 2A and 2B later in the analysis (Table
12).

TABLE 12—TYPES OF AFFECTED WORKERS

(E) MODELING CHANGES IN WAGES AND HOURS

The incomplete fixed-job model predicts that employers will adjust wages of
regular overtime workers but not to the full extent indicated by the fixed-job
model, and thus some employees will receive a small increase in weekly earnings
due to overtime pay coverage. The Department used the average of two estimates
of the incomplete fixed-job model adjustments to model impacts of this
rule: [384]

* Trejo's (1991) estimate that the overtime-induced wage change is 40 percent
of the adjustment toward the amount predicted by the fixed-job model,
assuming an initial zero overtime pay premium, and
* Barkume's (2010) estimate that the wage change is 80 percent of the predicted
adjustment assuming an initial 28 percent overtime pay premium.

This is approximately equivalent to assuming that salaried overtime workers
implicitly receive the equivalent of a 14 percent overtime premium in the
absence of regulation (the midpoint between 0 and 28 percent).

Modeling changes in hourly wages, hours, and earnings for Type 1 and Type 4
workers was relatively straightforward. Type 1 affected EAP workers will become
overtime-eligible, but because they do not work overtime, they will see no
change in their wages, hours, or weekly earnings. Type 4 workers will remain
exempt because their earnings will be raised to at least the updated EAP level
(either the standard salary level or HCE compensation level). These workers'
earnings will increase by the difference between their current earnings and the
amount necessary to satisfy the new salary or compensation level. It is possible
employers will increase these workers' hours in response to paying them a higher
salary, but the Department did not have enough information to model this
potential change.[385]

Modeling changes in wages, hours, and earnings for Type 2 and Type 3 workers was
more complex. The Department distinguished those who regularly work overtime
(Type 3 workers) from those who occasionally work overtime (Type 2 workers)
because employer adjustment to the rule may differ accordingly. Employers are
more likely to adjust hours worked and wages for regular overtime workers
because their hours are predictable. Conversely, in response to a transient,
perhaps unpredicted, shift in market demand for the good or service such
employers provide, employers are more likely to pay for occasional overtime
rather than adjust hours worked and pay. Start Printed Page 32919

The Department treated Type 2 affected workers in two ways due to the
uncertainty of the nature of these occasional overtime hours. The Department
assumed that 50 percent of these occasional overtime workers worked unexpected
overtime hours (Type 2A) and the other 50 percent worked expected overtime (Type
2B). Workers were randomly assigned to these two groups. Workers with expected
occasional overtime hours were treated like Type 3 affected workers (incomplete
fixed-job model adjustments). Workers with unexpected occasional overtime hours
were assumed to receive a 50 percent pay premium for the overtime hours worked
and receive no change in base wage or hours (full overtime premium model).[386]
When modeling Type 2 workers' hour and wage adjustments, the Department treated
those identified as Type 2 using the CPS data as representative of all Type 2
workers.[387] The Department estimated employer adjustments and transfers
assuming that the patterns observed in the CPS reference week are representative
of an average week in the year. Thus, the Department assumes total transfers for
the year are equal to 52 times the transfers estimated for a representative week
for which the Department has CPS data. However, these transfers are spread over
a larger group including those who occasionally work overtime but did not do so
in the CPS reference week.[388]

Since employers will pay more for the same number of labor hours, for Type 2 and
Type 3 EAP workers, the quantity of labor hours demanded by employers will
decrease. The reduction in hours is calculated using the elasticity of labor
demand with respect to wages. The Department used a short-term demand elasticity
of −0.20 to estimate the percentage decrease in hours worked in Year 1 and a
long-term elasticity of −0.4 to estimate the percentage decrease in hours worked
in Years 2-10. These elasticity estimates are based on the Department's analysis
of Lichter et al. (2014).[389 390] Brown and Hamermesh (2019) estimated the
elasticity of overtime hours for EAP-exempt workers.[391] This estimate is based
on a difference-in-differences in hours for two groups of workers between two
time periods. However, some groups of workers are incorrectly defined, so the
Department has not used these estimates.[392]

For Type 3 affected workers, and the 50 percent of Type 2 affected workers who
worked expected overtime, the Department estimated adjusted total hours worked
after making wage adjustments using the incomplete fixed-job model. To estimate
adjusted hours worked, the Department set the percent change in total hours
worked equal to the percent change in average wages multiplied by the wage
elasticity of labor demand.[393] Figure 4 is a flow chart summarizing the four
types of affected EAP workers. Also shown are the effects on exempt status,
weekly earnings, and hours worked for each type of affected worker.

Start Printed Page 32920

FIGURE 4—FLOW CHART OF THE RULE'S EFFECT ON EARNINGS AND HOURS WORKED

Start Printed Page 32921

(F) ESTIMATED NUMBER OF AND EFFECTS ON AFFECTED EAP WORKERS

The Department estimated the rule will affect 4.3 million workers (Table 13), of
which 3.0 million are Type 1 workers (68.7 percent of all affected EAP workers),
704,000 were estimated to be Type 2 workers (16.2 percent), 558,800 were Type 3
workers (12.9 percent), and 94,100 were estimated to be Type 4 workers (2.2
percent).

TABLE 13—AFFECTED EAP WORKERS BY TYPE (1,000S), YEAR 1

The rule will affect some affected workers' hourly wages, hours, and weekly
earnings. Predicted changes in implicit wage rates are outlined in Table 14,
changes in hours in Table 15, and changes in weekly earnings in Table 16. How
these will change depends on the type of worker, but on average the Department
projects that weekly earnings will be unchanged or increase while hours worked
will be unchanged or decrease.

Type 1 workers will have no change in wages, hours, or earnings due to the
overtime pay provision because these workers do not work overtime.[394]

Start Printed Page 32922

For Type 2A workers, the Department assumed employers will be unable to adjust
the hours or regular rate of pay for these occasional overtime workers whose
overtime is irregularly scheduled and unpredictable. These workers will receive
a 50 percent premium on their regular hourly wage for each hour worked in excess
of 40 hours per week, and so average weekly earnings would increase.[395]

For Type 3 workers and Type 2B workers (the 50 percent of Type 2 workers who
regularly work occasional overtime, an estimated 969,100 workers), the
Department used the incomplete fixed-job model to estimate changes in the
regular rate of pay. These workers will see a decrease in their average regular
hourly wage and a small decrease in hours. However, because these workers will
receive a 50 percent premium on their regular hourly wage for each hour worked
in excess of 40 hours per week, their average weekly earnings will increase. The
reduction in hours is relatively small and is due to a decrease in labor demand
from the increase in the average hourly wage as predicted by the incomplete
fixed-job model (Table 15).

Type 4 workers' implicit hourly rates of pay and weekly earnings will increase
to meet the updated standard salary level or HCE annual compensation level. Type
4 workers' hours may increase to offset the additional earnings, but due to lack
of data, the Department assumed hours would not change.

TABLE 14—AVERAGE REGULAR RATE OF PAY BY TYPE OF AFFECTED EAP WORKER, YEAR 1

Start Printed Page 32923

TABLE 15—AVERAGE WEEKLY HOURS BY TYPE OF AFFECTED EAP WORKER, YEAR 1

Start Printed Page 32924

TABLE 16—AVERAGE WEEKLY EARNINGS BY TYPE OF AFFECTED EAP WORKER, YEAR 1

At the new standard salary level, the average weekly earnings of affected
workers will increase $5.96 (0.6 percent), from $947.71 to $953.67. Multiplying
the average change of $5.96 by the 4.0 million EAP workers affected by the
combination of the initial update and the subsequent application of the new
standard salary level and 52 weeks equals an increase in earnings of $1.3
billion in the first year. For workers affected by the change in the HCE
compensation level, average weekly earnings will increase by $16.79. When
multiplied by 292,900 affected workers and 52 weeks, the national increase will
be $255.6 million in the first year. Thus, total Year 1 transfer payments
attributable to this rule will equal $1.5 billion.

The Department is only aware of one paper that modeled the impacts of the 2019
rule's increases in the salary and compensation levels. Quach (2024) [396] used
administrative payroll data from May 2008 to July 2021 to estimate the impacts
of the rescinded 2016 rule and the 2019 rule on employment, earnings, and salary
status.[397] The paper has not been published in a peer-reviewed journal and has
significant limitations, including that its use of administrative payroll data
from ADP means that the findings are not representative as ADP customers do not
represent a random sample of the workplace.

In terms of its findings, concerning employment, the author found that
expansions in overtime coverage actually had little effect on employment. He
also found that average weekly earnings rose by about 1.4% for salaried workers,
and found no evidence that firms reduced base pays in response to changes in the
overtime threshold. Concerning salary status, he found that approximately 2.6%
of affected workers are re-classified from salaried to hourly status. The
Department has not adjusted its methodology in response to this paper given the
concerns listed above.

Additionally, it can be informative to look at papers which predict the impact
of rulemakings. For example, Rohwedder and Wenger (2015) analyzed the effects of
increasing the standard salary level from the then baseline level of $455 per
week.[398] They compared hourly and salaried workers in the CPS using quantile
treatment effects. This methodology estimates the effect of a worker becoming
nonexempt by comparing similar workers who are hourly and salaried. They found
no statistically significant change in hours or wages on average. However, their
point estimates, averaged across all affected workers, show small increases in
earnings and decreases in hours, similar to the Department's analysis. For
example, using a salary level of $750, they estimated weekly earnings may
increase between $2 and $22 and weekly hours may decrease by approximately 0.4
hours.

Start Printed Page 32925

IV. POTENTIAL TRANSFERS NOT QUANTIFIED

This rule could lead to additional transfers that the Department is unable to
quantify. For example, in response to this rule, some employers may decrease the
hours of newly nonexempt workers who usually work overtime. These hours may be
transferred to other workers, such as non-overtime workers and exempt workers
who are not affected by the rule. Depending on how these hours are transferred,
it could lead to either a reduction or increase in earnings for other workers.
Employers may also offset increased labor costs by reducing bonuses or benefits
instead of reducing base wages or hours worked. If this occurs, an employee's
overall compensation may not be affected.

The rule could also reduce reliance on social assistance programs for some
workers who may receive a transfer of income resulting from this rule. For
low-income workers, this transfer could result in a reduced need for social
assistance programs such as Medicaid, the Earned Income Tax Credit (EITC), the
Supplemental Nutrition Assistance Program (SNAP), the Temporary Assistance for
Needy Families (TANF) program, the Special Supplemental Nutrition Program for
Women, Infants, and Children (WIC), and free or reduced-priced school meals. A
worker earning the current salary level of $684 per week earns $35,568 annually,
which is roughly equivalent to the Federal poverty level for a family of five
and makes the family eligible for multiple social assistance programs.[399]
Thus, transferring income to these workers could reduce eligibility for
government social assistance programs. This could lead to an increase or a
reduction in a family's total resources, depending on the relative size of the
increase in earnings and the value of the decrease in assistance. Regardless,
reduced eligibility for social assistance programs would reduce government
expenditures at the Federal, State, and/or local level.

5. BENEFITS AND COST SAVINGS

The Department expects that this rule could lead to multiple benefits, which
were discussed qualitatively in the NPRM. These potential benefits and commenter
feedback about them are addressed below.

The revised salary level will strengthen the overtime protection of salaried,
white-collar employees who do not pass the standard duties test and who earn
between the current salary standard salary level and the new standard salary
level. These employees are nonexempt but, because they satisfy the current
salary level threshold, employers must apply the duties test to determine their
exemption status. At the new salary level, the number of white-collar salaried
employees who earn between the current and the new salary levels and fail the
duties test would decrease by 4.7 million. Because these nonexempt employees no
longer meet the salary level, employers will be able to determine their
exemption status based solely on the salary test. If any of these employers
previously spent significant time evaluating the duties of these workers to
determine exemption status, the change to determining exemption status based on
the salary level could lead to some cost savings. Also, as many commenters
observed, the new salary level will strengthen the right to overtime pay for
nonexempt workers who earn between the current and new standard salary levels.
See, e.g., Coalition of State AGs; Coalition of Gender Justice and Civil Rights
Organizations; Washington Dept. of Labor & Industries. Similarly, to the extent
that some of these 4.7 million employees are currently misclassified as exempt,
the new salary level will make it more clear for workers and employers that such
workers are not EAP exempt.[400] Thus, this aspect of the rule is responsive to
commenter concerns that the current salary level is too low to prevent the
misclassification of salaried employees who fail the duties test. See e.g.,
AFSCME; EPI; NELP; Sanford Heisler Sharp.

Commenters disagreed over whether the proposed rule would improve or hinder the
productivity of affected workers. Some commenters, such as the AFL-CIO, agreed
with the analysis provided in the NPRM that this rulemaking could increase
productivity “by reducing turnover, incentivizing workers to work harder, and
increasing marginal productivity as fewer hours are worked.” In contrast, a
number of employer representatives asserted that the rule would hinder worker
productivity. For example, PPWO asserted that affected workers who become
nonexempt “will now need to account for their time in a way they have not had to
previously, and in a way that their exempt co-workers do not.” See also, e.g.,
AFPI.

The Department continues to believe that the rule could potentially lead to
increased worker productivity if workers receive an increase in compensation.
Increased productivity could occur through numerous channels, such as employee
retention and level of effort. A strand of economic research, commonly referred
to as “efficiency wage” theory, considers how an increase in compensation may be
met with greater productivity.[401] Efficiency wages may elicit greater effort
on the part of workers, making them more effective on the job.[402] Other
research on increases in the minimum wage have demonstrated a positive
relationship between increased compensation and worker productivity. For
example, Kim and Jang (2019) showed that wage raises increase productivity for
up to two years after the wage increase.[403] They found that in both full and
limited-service restaurants productivity increased due to improved worker morale
after a wage increase. Additionally, research demonstrates a correlation between
increased earnings and reduced employee turnover.[404 405] Reducing turnover, in
turn, may increase productivity because longer-tenured employees have more
firm-specific skills and knowledge and thus could be more productive and require
less Start Printed Page 32926 supervision and training.[406] Reduced turnover
could also reduce firms' hiring and training costs. As a result, even though
marginal labor costs rise, they may rise by less than the amount of the wage
change because the higher wages may be offset by increased productivity and
reduced hiring costs for firms.

This rulemaking could also result in an increase in personal time for some
affected workers. Worker advocacy organizations and individual commenters
asserted that employees would generally enjoy more personal time as a
consequence of the rule. For example, SEIU commented that “[w]hen workers are
exempted from overtime pay protections, it disincentivizes employers from being
efficient with [employees'] time.” Due to the increase in marginal cost for
overtime hours for newly overtime-eligible workers, employers could demand fewer
hours from some of the workers affected by this rulemaking. If these workers'
pay remains the same, they could benefit from increased personal time and
improved work-life balance. Empirical evidence shows that workers in the United
States typically work more than workers in other comparatively wealthy
countries.[407] Workers in executive, administrative, and professional
occupations tend to work longer hours.[408] They also have the highest
percentage of workers who would prefer to work fewer hours compared to other
occupational categories.[409] Therefore, the Department believes that this rule
may result in reduced time spent working overtime for a group of workers, some
of whom may prefer such an outcome.

6. SENSITIVITY ANALYSIS OF TRANSFER PAYMENTS

Because the Department cannot predict employers' precise reactions to the rule,
the Department calculated bounds on the size of the estimated transfers from
employers to workers, relative to the primary estimates in this RIA. For the
upper bound, the Department assumed that the full overtime premium model is more
likely to occur than in the primary model. For the lower bound, the Department
assumed that the complete fixed-job model is more likely to occur than in the
primary model. Based on these assumptions, estimated transfers may range from
$631.1 million to $2.9 billion, with the primary estimate equal to $1.5 billion.

For a reasonable upper bound on transfer payments, the Department assumed that
all occasional overtime workers and half of regular overtime workers would
receive the full overtime premium ( i.e., such workers will work the same number
of hours but be paid 1.5 times their implicit initial hourly wage for all
overtime hours) (Table 17). The full overtime premium model is a special case of
the fixed-wage model where there is no change in hours. For the other half of
regular overtime workers, the Department assumed in the upper-bound method that
they would have their implicit hourly wage adjusted as predicted by the
incomplete fixed-job model (wage rates fall and hours are reduced but total
earnings continue to increase, as in the primary method). In the primary model,
the Department assumed that only 50 percent of occasional overtime workers and
no regular overtime workers would receive the full overtime premium.

The plausible lower bound on transfer payments also depends on whether employees
work regular overtime or occasional overtime. For those who regularly work
overtime hours and half of those who work occasional overtime, the Department
assumed the employees' wages would fully adjust as predicted by the fixed-job
model.[410] For the other half of employees with occasional overtime hours, the
lower bound assumes they would be paid one and one-half times their implicit
hourly wage for overtime hours worked (full overtime premium).

Start Printed Page 32927

TABLE 17—SUMMARY OF THE ASSUMPTIONS USED TO CALCULATE THE LOWER ESTIMATE,
PRIMARY ESTIMATE, AND UPPER ESTIMATE OF TRANSFERS

7. EFFECTS BY REGIONS AND INDUSTRIES

This section compares the number of affected workers, costs, and transfers
across regions and industries. Although impacts will be more pronounced in some
regions or industries, the Department has concluded that in no region or
industry are the costs overly burdensome. The proportion of total costs and
transfers in each region will be fairly consistent with the proportion of total
workers in each region. Affected workers are overrepresented in some industries,
but costs and transfers will still be manageable as a share of payroll and of
total revenue ( See Table 21 for regions and Table 24 for industries).

The Department also compared costs and transfers relative to total payrolls and
revenues. This provides a common method of assessing the relative effects of the
rule on different regions or industries, and the magnitude of adjustments the
rule may require on the part of enterprises in each region or industry. The
relative costs and transfers expressed as a percentage of payroll are
particularly useful measures of the relative size of adjustment faced by
organizations in a region or industry because they benchmark against the cost
category directly associated with the labor force. Average estimated costs and
transfers from this rule are very small relative to current payroll or current
revenue—less than a tenth of a percent of payroll and of revenue in each region
and in each industry.

Salaries vary across the U.S. geographically. To ensure the new standard salary
level would not be too high in any region of the country, the Department has
used only wages in the lowest-wage region, the South,[411] to set the salary
level. However, because wages are lower in the South and the Midwest [412] than
the Northeast [413] and the West,[414] impacts may be larger in these two
lower-wage regions. This section considers impacts across the four Census
regions to ensure the impacts in the lower-wage regions would be manageable. The
South has by far the most affected workers (1.9 million), though it also has the
most workers of any Census region (Table 18). As a share of potentially affected
workers in the region, the South will have somewhat more affected workers
relative to other regions (17.9 percent are affected compared with 11.0 to 15.4
percent in other regions). However, as a share of all workers in the region, the
South will not be particularly affected relative to other regions (3.5 percent
are affected compared with 2.3 to 3.0 percent in other regions).

TABLE 18—POTENTIALLY AFFECTED AND AFFECTED WORKERS, BY REGION, YEAR 1

Start Printed Page 32928

Total transfers in the first year were estimated to be $1.5 billion (Table 19).
As expected, the transfers in the South will be the largest portion because the
largest number of affected workers would be in the South. However, transfers per
affected worker will be less in the South than in other Census regions. Annual
transfers per affected worker will be $291 in the South, and between $346 and
$462 in other regions.

TABLE 19—ANNUAL TRANSFERS BY REGION, YEAR 1

TABLE 20—ANNUAL COSTS BY REGION, YEAR 1

Start Printed Page 32929

Direct employer costs are composed of regulatory familiarization costs,
adjustment costs, and managerial costs. The Department estimates that total
direct employer costs will be the highest in the South ($581.7 million) and
lowest in the Northeast ($240.7 million). Transfers and direct employer costs in
each region, as a percentage of the total transfers and direct costs, would
range from 16.9 percent in the Northeast to 38.2 percent in the South. These
proportions are almost the same as the proportions of the total workforce in
each region: 17.8 percent in the Northeast and 37.0 percent in the South. Costs
and transfers per establishment would be slightly higher in the Midwest ($392)
than on average, but still small (Table 21).

Another way to compare the relative effects of this rule by region is to
consider the transfers and costs as a proportion of payroll and revenues (Table
21).[415] Nationally, employer costs and transfers will be approximately 0.031
percent of payroll. By region, direct employer costs and transfers as a percent
of payroll will be approximately the same (between 0.025 and 0.036 percent of
payroll). Employer costs and transfers as a percent of revenue will be 0.006
percent nationally and range between 0.005 and 0.006 percent in each region.

TABLE 21—ANNUAL TRANSFERS AND COSTS AS PERCENT OF PAYROLL AND OF REVENUE BY
REGION, YEAR 1

Impacts may be more pronounced in some industries. In particular, lower-wage
industries where more workers may earn between $684 and the new salary level may
be impacted more. Additionally, industries where EAP workers are more prevalent
may experience larger impacts. To gauge the effect of the rule on industries,
the Department estimated affected workers, costs, and transfers for the 13 major
industry groups. The Department also compared estimates of combined costs and
transfers as a percent of payroll and revenue across industries.

Table 22 presents the number of affected workers by industry. The industry with
the most affected workers is professional and business services (827,400). The
industry with the largest share of workers affected is financial activities (5.7
percent). This is because the financial activities industry is heavily composed
of salaried white-collar workers. As a share of potentially affected workers,
the industry with the highest share affected is leisure and hospitality (24.3
percent), followed by agriculture, forestry, fishing, & hunting (22.8 percent).

Start Printed Page 32930

TABLE 22—POTENTIALLY AFFECTED AND AFFECTED WORKERS, BY INDUSTRY, YEAR 1

Both transfers and costs will be the largest in the professional and business
services industry because this industry is large and heavily composed of
salaried white-collar workers (Table 23). Combined, in Year 1, these total
$564.7 million and represent 19.2 percent of nationwide transfers and costs.
Transfers and costs are also large in the healthcare and social services
industry, at least partially due to the large size of this industry. However,
transfers per affected worker will be relatively low in this industry, $229 in
the first year compared with $348 nationally. A third industry with relatively
large total transfers and costs is the retail trade industry.

Start Printed Page 32931

TABLE 23—ANNUAL TRANSFERS AND COSTS BY INDUSTRY, YEAR 1

To measure the impact on businesses, a comparison of transfers and costs to
payroll, revenue, or profit is more helpful than looking at the absolute size of
transfers and costs per industry. As a percent of payroll, transfers and costs
would be highest in agriculture, forestry, fishing, and hunting; retail trade;
leisure and hospitality; and education (Table 24). However, the magnitude of the
relative shares will be small, representing less than 0.1 percent of payroll
costs in all industries. The Department's estimates of transfers and costs as a
percent of revenue by industry also indicated a very small effect of less than
0.03 percent of revenues in any industry. The industries with the largest
transfers and costs as a percent of revenue will be education; leisure and
hospitality; and professional and business services. Table 24 illustrates that
the differences in costs and transfers relative to revenues will be quite small
across industry groupings.

The overall magnitude of costs and transfers as a percentage of profits
represents less than 1.0 percent of overall profits in each industry.[416 417]
By industry, the value of total costs and transfers as a percent of profits
ranges from a low of 0.02 percent (wholesale trade) to a high of 0.62 percent
(agriculture, forestry, fishing, and hunting). Benchmarking against profits is
potentially helpful in the sense that it provides a measure of the rule's effect
against returns to investment. However, this metric must be interpreted
carefully as it does not account for differences across industries in
risk-adjusted rates of return which are not readily available for this analysis.
The ratio of costs and transfers to profits also does not reflect Start Printed
Page 32932 differences in the firm-level adjustment to profit impacts reflecting
cross-industry variation in market structure.[418]

TABLE 24—ANNUAL TRANSFERS, TOTAL COSTS, AND TRANSFERS AND COSTS AS PERCENT OF
PAYROLL, REVENUE, AND PROFIT BY INDUSTRY, YEAR 1

Start Printed Page 32933

8. REGULATORY ALTERNATIVES

The Department considered a range of alternatives before selecting its methods
for setting the standard salary level and the HCE compensation level. As seen in
Table 25, the Department has calculated the salary/compensation levels, the
number of affected workers, and the associated costs and transfers for these
alternative levels.

The Department is increasing the standard salary level using earnings for the
35th percentile of full-time salaried workers in the South Census Region, $1,128
per week. The alternative methods considered for setting the standard salary
level are:

• Alternative 1: 2004/2019 method—$844 per week—20th percentile of earnings of
nonhourly full-time workers in the South Census region and/or in the retail
industry nationally.

• Alternative 2: Kantor long test method—$942 per week—10th percentile of
earnings of likely exempt workers.

• Alternative 3: 2016 method—$1,196 per week—40th percentile of earnings of
nonhourly full-time workers in the South Census region.

• Alternative 4: Kantor short test method—$1,404 per week—Kantor long test level
multiplied by 149 percent (the historical average relationship between the long
and short test levels).

The Department considered using the 2004 methodology (the 20th percentile of
full-time salaried white-collar workers in the lowest-wage Census region
(currently the South) and/or in retail nationally), which is currently $844 per
week ($43,888 per year). This is also the methodology that the Department used
in the 2019 rule.[419] However, the salary level produced by the 2004
methodology is below the current equivalent long test salary level ($942 per
week), which the Department considers to be a key parameter for determining an
appropriate salary level.

The Department also considered setting the standard salary level at the long
test level ($942 per week or $48,984 per year). Doing so would ensure the
initial screening function of the salary level by restoring overtime protections
to those employees who were consistently excluded from the EAP exemption under
each iteration of the regulations prior to 2019, either by the long test salary
level itself, or under the 2004 rule salary level, which was set equivalent to
the long test salary level.[420] However, as explained above, setting the
standard salary level at the long test level would not address the impact of the
change from a two-test to a one-test system.

The Department also considered setting the standard salary level at the 40th
earnings percentile of salaried white-collar workers in the lowest-wage Census
Region (currently the South) ($1,196 per week or $62,192 per year). However, the
Department is concerned that this approach could be seen by courts as making
salary level determinative of exemption status for too large a portion of
employees, as this salary level would make the salary paid by the employer
determinative of exemption status for more than half (55 percent) of
white-collar employees who earn between the long and short test salary levels.
The Department is also concerned that this approach would generate the same
concerns that led to the district court decision invalidating the 2016 rule
(which adopted the same methodology).

Finally, the Department considered setting the standard salary level at the
current equivalent of the short test salary level ($1,404 per week or $73,008
per year). This would ensure that all employees who earn between the long and
short test salary levels and perform substantial amounts of nonexempt work would
be entitled to overtime compensation. However, by making exemption status for
all employees who earn between the long and short test levels depend on the
salary paid by the employer, this approach would prevent employers from being
able to use the EAP exemption for employees earning between these salary levels
who do not perform substantial amounts of nonexempt work and thus were
historically exempt under the long test.

As described above, the Department is setting the HCE compensation level using
earnings for the 85th percentile of all full-time salaried workers nationally,
$151,164 per year. The Department also evaluated the following alternative
methods to set the HCE compensation levels:

• HCE alternative 1: 2019 method [421] —$132,964 annually—80th percentile of
earnings of nonhourly full-time workers nationally.

• HCE alternative 2: 2016 method [422] —$179,972 annually—90th percentile of
earnings of nonhourly full-time workers nationally.

The Department believes that HCE alternative 1 does not produce a threshold high
enough to reserve the HCE test for employees who would “almost invariably pass
the standard duties test.” The Department also considered setting the HCE
threshold at the 90th percentile; however, the Department is concerned that the
resulting level ($179,972) would restrict the use of the HCE exemption for
employers in low-wage regions and industries. The Department believes its
proposal to adjust the HCE total annual compensation threshold to reflect the
85th percentile of earnings of nonhourly full-time workers nationally strikes
the appropriate balance and ensures that the HCE test continues to serve its
intended function as a streamlined alternative for employees who are highly
likely to pass the standard duties test.

Start Printed Page 32934

TABLE 25—UPDATED STANDARD SALARY AND HCE COMPENSATION LEVELS AND ALTERNATIVES,
AFFECTED EAP WORKERS, COSTS, AND TRANSFERS, YEAR 1

Start Printed Page 32935

9. TRIENNIAL UPDATES TO THE STANDARD SALARY AND ANNUAL COMPENSATION THRESHOLDS

Between updates to the standard salary and HCE compensation levels, nominal
wages typically increase, resulting in an increase in the number of workers
qualifying for the EAP exemption, even if there has been no change in their real
earnings. Thus, workers whom Congress intended to be covered by the minimum wage
and overtime pay provisions of the FLSA may lose those protections. The
mechanism the Department established in this rulemaking for updating the salary
and compensation levels allows these thresholds to keep pace with changes in
earnings and continue to serve as an effective dividing line between potentially
exempt and nonexempt workers. Furthermore, the updating mechanism will provide
employers more certainty in knowing that these levels will change by smaller
amounts on a regular basis, rather than the more disruptive increases caused by
much larger changes after longer, uncertain increments of time. This will allow
firms to better predict short- and long-term costs and employment needs. In
addition to the changes being made to the standard salary level and HCE
compensation threshold, the Department is including in this rule a mechanism for
updating the salary and compensation levels initially on July 1, 2024 and every
3 years thereafter to reflect current earnings.

I. INITIAL UPDATE

As discussed in section IV, the new standard salary level and HCE total annual
compensation threshold methodologies do not become applicable until
approximately 8 months after publication of this final rule. Therefore, the
initial update on July 1, 2024 will use the methodologies in place at the time
of the update ( i.e., the 2019 rule methodologies), which results in a $844 per
week standard salary level and a $132,964 HCE total annual compensation
threshold. Consistent with the 2019 rule, the Department used pooled CPS data
for the most recent 3 years (2021, 2022, 2023), adjusted to reflect 2023, for
the initial updates to the standard salary and annual compensation thresholds.

As previously discussed, the Department's affected worker, cost, and transfer
estimates for Year 1 have accounted for the initial update and the new standard
salary and annual compensation thresholds that become applicable 6 months after
the initial update. Just looking at the initial update, the Department estimated
the initial update to the standard salary level will affect workers who earn
between $684 and $844 per week. The Department estimates that this update will
result in 959,000 affected workers. Of these affected workers, 68.7 percent of
them do not work overtime. The Department estimated the Year 1 adjustment and
managerial costs for just this update would be $202.3 million and transfer
payments would be $204.3 million. For the initial update to the HCE total annual
compensation threshold, the Department estimated that just the update would
result in 223,000 affected workers, $58.7 million in adjustment and managerial
costs, and $164.5 million in transfer payments in Year 1.

II. FUTURE UPDATES

The Department is establishing future updates to the standard salary level and
HCE total annual compensation threshold with current earnings data beginning 3
years after the date of the initial update, and every 3 years thereafter, using
the methodologies in place at the time of the updates. For purposes of this
analysis, the Department assumes that the future triennial updates to the
standard salary level will be based on the same methodology that the Department
used to set the new standard salary level in this rule: the 35th percentile of
weekly earnings of full-time salaried workers in the lowest-wage Census Region
(currently the South). Likewise, the Department assumes that future triennial
updates to the HCE total annual compensation level will be based on the same
methodology the Department used to set this earnings threshold in this
rulemaking: the annualized weekly earnings of 85th percentile of full-time
salaried workers nationally.

As previously discussed, future triennial updates will set the earnings
thresholds using the most recent available 4 quarters of CPS data preceding the
Department's notice with the updated thresholds. To estimate future thresholds
in years when the salary and compensation levels will be updated, the Department
used the historic geometric growth rate between 2012 and 2022 in (1) the 35th
earnings percentile of full-time salaried workers in the South for the standard
salary level and (2) the annualized weekly earnings of the 85th percentile of
full-time salaried workers nationally for the HCE compensation level. For
example, between 2012 and 2022, the annual growth rate in the 35th percentile of
full-time salaried workers in the South has increased by 3.17 percent. To
estimate the first future triennial update salary level of $1,239, the
Department multiplied $1,128 by 1.0317 to the power of three. Figure 5 shows the
projected future triennial update levels for the first 10 years. Note that these
projections are illustrative estimates based on past wage growth; the actual
level at the time of the update will depend on the wage growth that occurs
between now and the update date. Figure 6 shows the standard salary levels in
both nominal and 2023 dollars.

FIGURE 5—PROJECTED FUTURE SALARY AND COMPENSATION LEVELS, NOMINAL DOLLARS

Start Printed Page 32936

FIGURE 6—PROJECTED FUTURE STANDARD SALARY LEVELS, NOMINAL AND REAL (CONSTANT
2023 DOLLARS)

Start Printed Page 32937

III. CONCERNS WITH USE OF FIXED EARNINGS PERCENTILE AS UPDATING METHODOLOGY

As discussed in detail in section V.A.3.iii, some commenters expressed concern
that triennially updating the salary level using a fixed percentile of earnings
would result in the salary levels growing at too quick a rate. See, e.g.,
Chamber; National Lumber and Building Material Dealers Association; NRF;
Seyfarth Shaw.

These commenters stated that updating the standard salary level using a fixed
percentile of earnings of full-time salaried workers will cause some or all of
the newly nonexempt workers to be converted to hourly status and thus removed
from the data set, and earnings at the 35th percentile of salaried workers will
quickly rise solely due to the exclusion of these hourly workers (an effect some
commenters referred to as “ratcheting”). Commenters asserted that this may cause
growth in the 35th percentile of full-time salaried workers to no longer reflect
prevailing economic conditions.

Claims that an updating mechanism using the fixed percentile approach will lead
to the rapid escalation of the salary level are based primarily on the
assumption that employers will respond to this rulemaking by converting newly
nonexempt workers to hourly pay status. However, the Department believes these
concerns are overstated because many affected EAP workers who are reclassified
as nonexempt are likely to remain salaried as: (1) An analysis of the 2004
rule's salary level update did not indicate significant numbers of workers were
converted to hourly pay; and (2) an analysis of updates in California's higher
EAP exemption salary level (under state law) did not indicate significant
numbers of workers were reclassified as hourly. In any event, the Department's
modeling of the impact of updating shows that any potential “ratcheting” effect
that may occur would be small, largely because newly nonexempt workers compose a
small percentage of the pool of full-time nonhourly workers in the dataset used
to establish the salary level.

The analyses discussed below are based on CPS MORG data. As acknowledged in the
NPRM and above in section VII.B.5.i, salary status for CPS respondents cannot
definitively be determined because workers who indicate they are paid on a
salary basis or on some basis other than hourly are all classified as
“nonhourly.” To consider the possibility this biases our results, the Department
looked at the Panel Study of Income Dynamics (PSID). The PSID provides
additional information concerning salaried versus other nonhourly workers. In
the PSID, respondents are asked how they are paid on their main job and are
asked for more detail if their response is in some way other than salaried or
hourly.[423] The available responses include piecework, commission,
self-employed/farmer/profits, and by the job/day/mile. None of these options are
ones to which employers are likely to change their salaried workers. The share
of workers who are not paid on either an hourly or salaried basis is relatively
small, about 10 percent of workers in the PSID. Accordingly, grouping nonhourly
workers with salaried workers does not negate the following comparisons and
conclusions based on CPS data.

(A) WORKERS MAY REMAIN SALARIED EVEN IF NONEXEMPT

The Department disagrees with commenters that suggested that employers will
likely (or automatically) convert large numbers of newly nonexempt employees to
hourly pay status. In some instances such conversion may occur; for example, if
an employee regularly works overtime and the employer is able to adjust his or
her regular rate. However, for the majority of affected employees, there will be
no incentive for employers to convert them to hourly pay because they do not
work more than 40 hours in a workweek. Also, employers may have other incentives
to maintain workers' salaried status; for example, they may offer salaried
positions to attract talent. Some commenters representing employer interests
highlighted that employees value job characteristics associated with salaried
pay—such as earnings predictability—and so employers may pay nonexempt employees
on a salary basis to preserve these benefits. Using the CPS MORG data pooled for
2021-2023 and projected to 2023, the Department estimated that 29.4 percent of
white-collar workers earning below $684 per week are nonhourly; based on
findings from the PSID, the Department believes most of these nonhourly workers
are salaried. This data shows that even for some current nonexempt workers,
employers are choosing to keep them as salaried instead of hourly. Furthermore,
some nonhourly workers above the current salary threshold fail the duties test,
and are therefore nonexempt, which is further evidence that employers already
employ nonexempt workers who are paid on a salary basis.

(B) PREVIOUS SALARY LEVEL UPDATES DID NOT INDICATE A SIGNIFICANT NUMBER OF
WORKERS BEING CONVERTED TO HOURLY

The “ratcheting” concerns raised in the comments are very similar to comments on
this alleged effect that were received during the 2016 rulemaking. In that rule
the Department analyzed employer responses to the 2004 rule and to a series of
revisions to California's salary level test for exemption under state law in
order to better estimate whether workers who become nonexempt are more likely to
be paid on an hourly basis.[424] These analyses allow the identification of
potential regulatory impact while controlling for time trends and a broad range
of other relevant factors (education, occupation, industry, geographic location,
etc.).

In the 2016 rule the Department analyzed the effect of the Federal 2004 salary
level increase from $250 per week (short test salary level) to $455 (standard
salary level) on the share of full-time, white-collar workers paid hourly. The
analysis considered two types of differences: pre- versus post-rulemaking; and
workers exempt before, but not after the rule compared to workers exempt both
before and after the rule. As noted in the discussion of this analysis in the
2016 rule, if the salary level increase in the 2004 rule led employers to
convert significant numbers of workers to hourly status (as commenters assert
will result from the current rulemaking), then the Department would have
expected to see a notable increase in the share of workers earning just below
the new threshold at the time ($455) who are paid hourly relative to the share
of workers earning just above the new threshold who are paid hourly. Instead,
the Department found that between the first quarter of 2004 and the first
quarter of 2005, the share of full-time white-collar workers who are paid hourly
decreased marginally in the group of potentially affected workers (those earning
$250 to $455), whereas in the group earning above the salary level (those
earning more than $455 but less than $600) it increased by 2.6 percentage
points. These results do not suggest that the 2004 salary level increase caused
an increase in the share of workers paid hourly below the new threshold, and
thus provide no evidence that salary level increases due to triennial updates
will result in employers converting significant Start Printed Page 32938 numbers
of affected EAP workers to hourly pay status.

The Department did not replicate this analysis for the salary level increase in
the 2019 final rule, because it would require comparing a quarter in 2019 before
the effective date of the rule with a quarter in 2020 after the effective date.
The economic effects of the COVID-19 pandemic would make it impossible to
isolate the impact of the 2019 rule.

In the 2016 rule the Department also analyzed the effect of changes to
California statutes that set exempt salary levels at a level equal to twice the
state minimum wage for 40 hours worked per week. The analysis considered two
types of differences: pre- versus post-rulemaking; workers exempt before, but
not after the rule compared to workers exempt both before and after the rule;
and California workers versus workers in other states where the salary level was
not increased. The analysis of two updates found that the share of full-time
white-collar workers in California being paid hourly decreased from 73.4 percent
to 73.1 percent compared to an increase of 66.2 percent to 67.5 percent in
states where the salary level did not change after the 2007-2008 update, while
there was an increase from 72.0 percent to 74.0 percent in California compared
to an increase of 68.2 to 69.4 percent in other states after the 2014 update.

The Department found no evidence that changes in the salary level for exemption
resulted in a statistically significant increase in the percent of full-time
white-collar workers paid on an hourly basis following either the 2004 rule or
the California salary level updates.

In a study referenced by PPWO, Edgeworth Economics estimated the impact that an
updating mechanism using the fixed percentile approach would have on the salary
level. They found that “the DOL's automatic update mechanism would increase the
salary threshold by approximately 9.1% to the current 40th percentile [which
Edgeworth Economics estimated was equivalent to the 35th percentile of the
resulting distribution after workers are reclassified] within three years even
if there was not ANY wage growth.” Their estimate was based on the assumption
that all affected workers in the South Census Region who earn between $684 and
$1,059 per week and who are expected to pass the duties test, which they
estimate to be 1.4 million, would be reclassified to hourly employees, thus
falling out of the distribution of workers that are part of the 35th percentile
in the Census Region. However, as discussed above, the Department has found no
evidence that previous changes in the salary level for exemption have resulted
in a statistically significant increase in the percent of full-time white-collar
workers paid on an hourly basis.

NRF submitted a 2023 study by Oxford Economics that also considered how
converting salaried workers to hourly status could influence future triennial
updates. The Oxford study states that DOL's updating methodology “suffers from
the same technical flaw as its NPRM analysis of the effects of the proposed
regulation suffers from: the failure to model newly nonexempt affected workers
losing salaried status.” The study presents a visual analysis showing a share of
workers who earn below the overtime threshold losing their salaried status, and
a higher threshold for 2027 after this rule than in the scenario where there is
no change to the standard salary level. Like Edgeworth Economics, Oxford
Economics erroneously assumes that a large share of all affected workers will
lose their salaried status. As discussed previously, the Department has found no
evidence that previous changes in the salary level for exemption have resulted
in a statistically significant increase in the percent of full-time white-collar
workers paid on an hourly basis.

In 2016, the Department conducted a similar analysis, using what the Department
believes are more realistic assumptions, and found a significantly smaller
potential impact. The Department considered which affected workers are most
likely to be converted from salaried to hourly pay as a result of that
rulemaking. Type 4 workers, those whose salaries are increased to the new
standard salary level, remain exempt and their method of pay will not change.
Type 3 workers, who regularly work overtime and become nonexempt, and Type 2
workers, those who occasionally work overtime and become nonexempt, are the most
likely to have their pay status changed. Type 1 workers (who, at the time, made
up more than 60 percent of the affected workers) were assumed to not work
overtime, and employers thus have little incentive to convert them to hourly
pay. For this analysis, the Department assumed all Type 2 and Type 3 workers
were converted to hourly status to generate a realistic upper bound of the
magnitude of any possible ratcheting effect. The Department estimated that in
2026, after three updates over 10 years, the salary level as set in the final
rule (based on weekly earnings of full-time salaried workers in the South) could
be approximately 2.5 percent higher than expected due to this effect. This
figure is significantly smaller than the estimates provided by the commenters.
Furthermore, the Department believes its estimate is an overestimate because it
assumed employers convert all Type 2 and Type 3 workers to hourly status, which,
for the reasons discussed above and in section V.A.3.iii of the preamble, the
Department believes is a highly unlikely outcome. The Department did not
replicate this analysis for the salary level increase in the 2019 final rule,
because the economic effects of the COVID-19 pandemic make it difficult to
compare periods before and after the effective date of the 2019 final rule and
isolate the effect of the rule.

10. PROJECTIONS

The Department estimated that in Year 1, 4.3 million EAP workers will be
affected, with about 292,900 of these attributable to the revised HCE
compensation level (Table 26). In Year 10, the number of affected EAP workers
was estimated to equal 6.0 million with 1.0 million attributable to the updated
HCE compensation level. Average annualized costs are $802.9 million and
transfers are $1.5 billion using a 7 percent real discount rate. These
projections involved several steps.

1. Use past growth in the earnings distribution to estimate future salary and
compensation levels ( see section VII.C.9).

2. Predict workers' earnings, absent a change in the salary levels.

3. Compare workers' predicted earnings to the predicted salary and compensation
levels to estimate affected workers.

4. Project future employment levels.

5. Estimate employer adjustments to hours and pay.

6. Calculate costs and transfers.

Start Printed Page 32939

FIGURE 7—10-YEAR PROJECTED NUMBER OF AFFECTED WORKERS

FIGURE 8—10-YEAR PROJECTED COSTS AND TRANSFERS (MILLIONS $2023)

Start Printed Page 32940

TABLE 26—PROJECTED COSTS AND TRANSFERS, STANDARD SALARY AND HCE COMPENSATION
LEVELS

Start Printed Page 32941

The Department calculated workers' earnings in future years by applying the
historical wage growth rate in the workers' industry-occupation to current
earnings. The wage growth rate was calculated as the geometric growth rate in
median wages using CPS MORG data for occupation-industry categories from
2011-2023.[425] The geometric growth rate is the constant annual growth rate
that when compounded (applied to the first year's wage, then to the resulting
second year's wage, etc.) yields the last historical year's wage. This rate only
depends on the wage values in the first and last year.[426]

The geometric wage growth rates per industry-occupation combination were also
calculated from the BLS' Occupational Employment and Wage Statistics (OEWS)
survey for 2012 to 2022. In occupation-industry categories where the CPS MORG
data had an insufficient number of observations to reliably calculate median
wages, the Department used the growth rate in median wages calculated from the
OEWS data.[427] Any remaining occupation-industry combinations without
sufficient data in either data source were assigned the median of the growth
rates in median wages from the CPS MORG data.

The Department compared workers' counter-factual earnings ( i.e., absent the
rulemaking) to the predicted salary levels. If the counter-factual earnings are
below the relevant salary level ( i.e., standard or HCE) then the worker is
considered affected. In other words, in each year affected EAP workers were
identified as those who would be exempt absent the rule change ( e.g., would
earn at least $684 if exempt under standard salary level) but have projected
earnings in the future year that are less than the relevant salary level. The
projected number of affected workers also includes workers who were not EAP
exempt in the base year but will become exempt in the absence of this rule in
Years 2 through 10. For example, a worker who passes the standard duties test
may earn less than $684 in Year 1 but between $684 and the new salary level in
subsequent years; such a worker will be counted as an affected worker in those
subsequent years. Additionally, the number of affected workers is not limited to
newly affected workers. Workers who are affected in a given year may remain
affected in subsequent years ( e.g., because they earn between $684 and $1,128
in years 1, 2, and 3), and continue to be counted as affected.

The projected number of affected workers also accounts for anticipated
employment growth. Employment growth was estimated as the geometric annual
growth rate based on the 10-year employment projection from BLS' National
Employment Matrix (NEM) for 2022 to 2032 within an occupation-industry
category.[428 429] The Department applied these growth rates to the sample
weights of the workers to estimate increased employment levels over time. This
is because the Department cannot introduce new observations to the CPS MORG data
to represent the newly employed.

For workers newly affected in Year 2 through Year 10, employers' wage and hour
adjustments due to the rulemaking are generally estimated as described in
section VII.C.4. The only difference is the hours adjustment now uses a long-run
elasticity of labor demand of −0.4.[430] Employer adjustments are made in the
first year the worker is affected and then applied to all future years in which
the worker continues to be affected (unless the worker switches to a Type 4
worker). Workers' earnings in predicted years are earnings post employer
adjustments, with overtime pay, and with ongoing wage growth based on historical
growth rates (as described above).

The Department quantified three types of direct employer costs in the 10-year
projections: (1) regulatory familiarization costs; (2) adjustment costs; and (3)
managerial costs. Section VII.C.3 provides details on the methodology for
estimating these costs. This section only discusses the aspects specific to
projections. Projected costs and transfers were deflated to 2023 dollars using
the Congressional Budget Office's projections for the CPI-U.[431]

Regulatory familiarization costs occur in years when the salary and compensation
levels are updated. Thus, in addition to Year 1, some regulatory familiarization
costs are expected to occur in Year 4, Year 7, and Year 10. The Department
assumed 10 minutes per establishment for time to access and read the published
notice in the Federal Register with the updated standard salary level and HCE
compensation level. This average time estimate is low because the majority of
establishments will not have newly affected workers, and while some firms may
spend more than 10 minutes to read the new rule, many firms will spend no time.
The time estimate has been increased from 5 minutes in the 2016 rulemaking. In
each of these 3 years regulatory familiarization costs are between $68.9 and
$73.1 million. Although start-up firms must become familiar with the FLSA, the
difference between the time necessary for familiarization with the current part
541 exemptions and those exemptions as modified by this rulemaking is
essentially zero. Therefore, projected regulatory familiarization costs for new
entrants over the next 9 years are zero (although these new entrants will incur
regulatory familiarization costs in years when the salary and compensation
levels are updated).

Adjustment costs are a function of the number of newly affected EAP workers and
would occur in any year in which workers are newly affected. Adjustment costs
would be largest in Year 1, of moderate size in update years, and smaller in
other years. Management costs would recur each year for all affected EAP workers
whose hours are adjusted. Therefore, managerial costs increase in update years
and then modestly decrease between updates since earnings growth will cause some
workers to no longer be affected in those years. Start Printed Page 32942

The Department projected transfers from employers to employees due to the
minimum wage provision and the overtime pay provision. Transfers to workers from
employers due to the minimum wage provision would decline from $87.5 million in
Year 1 to $22.6 million in Year 10 as increased earnings over time move workers'
regular rates of pay above the minimum wage.[432] Transfers due to overtime pay
should grow slightly over time because the number of affected workers would
increase, although transfers fall in years between updates. Transfers to workers
from employers due to the overtime pay provision would increase from $1.4
billion in Year 1 to $2.5 billion in Year 10.

The Department compared projected impacts with and without updating (Table 27).
Projections without updating are shown so impacts of the initial increase and
subsequent increases can be disaggregated. With triennial updating, the number
of affected EAP workers would increase from 4.3 million to 6.0 million over 10
years. Conversely, in the absence of updating, the number of affected EAP
workers is projected to decline from 4.3 million in Year 1 to 2.6 million in
Year 10. As shown in Figure 9, the number of affected workers decreases from
year to year between updates as the real value of the salary and compensation
levels decrease, and then increases in update years.

Regarding costs, regulatory familiarization costs are lower without updating
because, in the absence of updating, employers would not need to familiarize
themselves with updated salary and compensation levels every 3 years. Adjustment
costs and managerial costs are a function of the number of affected EAP workers
and so will be higher with updating. Average annualized direct costs will be
$802.9 million with updating and $615.6 million without updating. Transfers are
also a function of the number of affected workers and hence are lower without
updating. Average annualized transfers with a 7 percent real discount rate will
be $1.5 billion with updating and $990 million without updating. Table 27 shows
aggregated costs and transfers over the 10-year horizon.

FIGURE 9—10-YEAR PROJECTED NUMBER OF AFFECTED WORKERS, WITH AND WITHOUT UPDATING

Start Printed Page 32943

TABLE 27—COMPARISON OF PROJECTED COSTS AND TRANSFERS WITH AND WITHOUT UPDATING

VIII. FINAL REGULATORY FLEXIBILITY ANALYSIS (FRFA)

The Regulatory Flexibility Act of 1980 (RFA) as amended by the Small Business
Regulatory Enforcement Fairness Act of 1996 (SBREFA), hereafter jointly referred
to as the RFA, requires that an agency prepare an initial regulatory flexibility
analysis (IRFA) when proposing, and a final regulatory flexibility analysis
(FRFA) when issuing, regulations that will have a significant economic impact on
a substantial number of small entities. The Department has determined that this
rulemaking is economically significant. This section (1) provides an overview of
the objectives of this rule; (2) estimates the number of affected small entities
and employees; (3) discusses reporting, recordkeeping, and other compliance
requirements; (4) presents the steps the Department took to minimize the
significant economic impact on small entities; and (5) declares that it is
unaware of any relevant Federal rules that may duplicate, overlap, or conflict
with this rule.

A. OBJECTIVES OF, AND NEED FOR, THE FINAL RULE

The FLSA requires covered employers to (1) pay employees who are covered and not
exempt from the Act's requirements not less than the Federal minimum wage for
all hours worked and overtime premium pay at a rate of not less than one and
one-half times the employee's regular rate of pay for all hours worked over 40
in a workweek, and (2) make, keep, and preserve records of the persons employed
by the employer and of the wages, hours, and other conditions and practices of
employment. The FLSA provides exemptions from the Act's minimum wage and
overtime pay provisions, including one for bona fide executive, administrative,
and professional (EAP) employees, as those terms are “defined and delimited” by
the Department.[433] The Department's regulations implementing this white-collar
exemption are codified at 29 CFR part 541.

To qualify for the EAP exemption under the Department's regulations, the
employee generally must meet three criteria: (1) the employee must be paid a
predetermined and fixed salary that is not subject to reduction because of
variations in the quality or quantity of work performed (the salary basis test);
(2) the amount of salary paid must meet a minimum specified amount (the salary
level test); and (3) the employee's job duties must primarily involve executive,
administrative, or professional duties as defined by the regulations (the duties
test). In 2004, the Department revised its regulations to include a highly
compensated employee test with a higher salary threshold and a minimal Start
Printed Page 32944 duties test.[434] The Department has periodically updated the
regulations governing the white-collar exemptions since the FLSA's enactment in
1938. Most recently, the 2019 rule updated the standard salary level test to
$684 per week and the HCE compensation level to $107,432 annually.

The goal of this rulemaking is to set effective earnings thresholds to help
define and delimit the FLSA's EAP exemption. To this end, the Department is
finalizing its proposed change to the salary level. Specifically, the Department
is adjusting the salary level by setting it equal to the 35th percentile of
weekly earnings of full-time salaried workers in the lowest-wage Census Region
(currently the South), based on the most recent year (2023) of Current
Population Survey (CPS) data at the time of drafting. Using BLS 2023 data on
percentiles of usual weekly earnings of nonhourly full-time workers, the
standard salary level will be set at $1,128 per week. Additionally, to maintain
the effectiveness of this test, the Department is finalizing an updating
mechanism that will update the earnings thresholds to reflect current wage data
on July 1, 2024 and every 3 years thereafter.

The Department's new salary level will, in combination with the standard duties
test, better define and delimit which employees are employed in a bona fide EAP
capacity in a one-test system. As explained in greater detail in sections III
and V.B, setting the standard salary level at or below the long test salary
level, as the 2004 and 2019 rules did, results in the exemption of
lower-salaried employees who traditionally were entitled to overtime protection
under the long test either because of their low salary or because they perform
large amounts of nonexempt work, in effect significantly broadening the
exemption compared to the two-test system. Setting the salary level at the low
end of the historic range of short test salary levels, as the 2016 rule did,
would have restored overtime protections to those employees who perform
substantial amounts of nonexempt work and earned between the long test salary
level and the low end of the short test salary range. However, it would also
have resulted in denying employers the use of the exemption for lower-salaried
employees who traditionally were not entitled to overtime compensation under the
long test, which raised concerns that the Department was in effect narrowing the
exemption. By setting a salary level above the equivalent of the long test
salary level (using current data), the final rule will restore the right to
overtime pay for salaried white-collar employees who prior to the 2019 rule were
always considered nonexempt if they earned below the long test (or long
test-equivalent) salary level. And it will ensure that fewer lower paid
white-collar employees who perform significant amounts of nonexempt work are
included in the exemption. At the same time, by setting it well below the
equivalent of the short test salary level (using current data), the rule will
allow employers to continue to use the exemption for many lower paid
white-collar employees who were made exempt under the 2004 standard duties test.
The new salary level will also more reasonably distribute between employees and
their employers what the Department now understands to be the impact of the
shift from a two-test to a one-test system on employees earning between the long
and short test salary levels.

As the Department has previously noted, the amount paid to an employee is “a
valuable and easily applied index to the ‘bona fide’ character of the employment
for which the exemption is claimed,” as well as the “principal[]” “delimiting
requirement” “prevent[ing] abuse” of the exemption.[435] Additionally, the
salary level test facilitates application of the exemption by saving employees
and employers from having to apply the more time-consuming duties analysis to a
large group of employees who will not pass it. For these reasons, the salary
level test has been a key part of how the Department defines and delimits the
EAP exemption since the beginning of its rulemaking on the EAP exemption.[436]
At the same time, the salary test's role in defining and delimiting the scope of
the EAP exemption must allow for appropriate examination of employee
duties.[437] Under the final rule, duties will continue to determine the
exemption status for most salaried white-collar employees.

The Department is also adjusting the HCE total annual compensation requirement
to the annualized weekly earnings for the 85th percentile of full-time salaried
workers nationally ($151,164 using 2023 data). Though not as high a percentile
as the HCE threshold initially adopted in 2004, which covered 93.7 percent of
all full-time salaried workers,[438] the Department's new HCE threshold will
ensure it continues to serve its intended function, because the HCE total annual
compensation level will be high enough to exclude all but those employees at the
very top of the economic ladder.

In its three most recent part 541 rulemakings, the Department has expressed its
commitment to keeping the earnings thresholds up to date to ensure that they
remain effective in helping differentiate between exempt and nonexempt
employees. Long intervals between rulemakings have resulted in eroded earnings
thresholds based on outdated earnings data that were ill-equipped to help
identify bona fide EAP employees. In contrast, routine updates to the part 541
earnings thresholds to reflect wage growth will bring certainty and stability to
employers and employees alike. Based on its long experience with updating the
salary levels, the Department has determined that adopting a regulatory
provision for regularly updating the salary levels, with an exception for
pausing future updates under certain conditions, is the most viable and
efficient way to ensure the EAP exemption earnings thresholds keep pace with
changes in employee pay and thus remain effective in helping determine exemption
status. Accordingly, the Department is including in this rule a mechanism for
updating the salary and compensation levels, to reflect current wage data, on
July 1, 2024 and every 3 years thereafter. As explained in greater detail in
section V.A, employees and employers alike will benefit from the certainty and
stability of regularly scheduled updates.

B. RESPONSE TO COMMENT FILED BY THE CHIEF COUNSEL FOR ADVOCACY OF THE SMALL
BUSINESS ADMINISTRATION

SBA Advocacy expressed similar concerns as those expressed by other small
business commenters, based upon its meetings, roundtables, and other discussions
regarding the NPRM. SBA Advocacy stated that it was concerned that the IRFA
underestimated the compliance costs of the rule, the proposed rule would add to
the current difficult business environment, the proposed rule would have
significant impacts on small nonprofits, the IRFA did not account for
non-financial costs to small entities and employees, and the IRFA did not
consider less burdensome alternatives. SBA Advocacy recommended that the
Department issue a supplemental RFA to reanalyze small entity impacts, adopt a
lower standard salary level, update the standard salary level every four years
through notice and comment rulemaking, publish a Start Printed Page 32945 small
entity compliance guide, provide more time for compliance, and add provisions to
help small nonprofits comply. SBA Advocacy's comments and the Department's
response to those comments are discussed in detail below.

SBA Advocacy reported that participants at its roundtables estimated first year
costs would be much higher than the estimates in the IRFA, from $20,000 to over
$200,000 in compliance costs per small entity. SBA Advocacy asserted that small
businesses may have to hire outside staff to interpret and implement the rule
and face high administrative and operational costs to schedule and track
employee hours to minimize overtime costs. SBA Advocacy also stated that
participants at their roundtables reported much higher payroll costs than the
estimates provided by the Department in the IRFA. Advocacy further stated that
the IRFA failed to estimate compliance costs by small entity size and revenue by
presenting average impacts by industry.

The assumptions small businesses used to estimate first-year compliance costs
ranging from $20,000 to $200,000 per entity were not described. However, the
Department clearly outlined its methodology and assumptions used to estimate
regulatory familiarization, adjustment, and management costs that it expects
businesses, including small businesses, might incur. The Department disagrees
that it underestimated small entity costs in the IRFA. First, this rulemaking is
narrow in scope as it only makes changes relating to earnings thresholds in the
part 541 regulations. The Department published final rules changing the salary
thresholds in 2016 and 2019. The Department therefore expects that most
businesses will not require significant time to become familiar with these
regulations, or that they will require significant time from outside
consultants. Furthermore, the Department expects that small entities will rely
upon compliance assistance materials provided by the Department, including the
small entity compliance guide that will be published, or industry associations
to become familiar with the final rule.

Second, the Department estimates businesses will require an average of 75
minutes per employee to choose how to make adjustments for affected employees.
The Department expects that employers will most likely need to spend little to
no time making adjustments for many affected workers, such as the almost 70
percent of the employees who do not work overtime (Type 1 employees) and those
whose salaries are well below the new standard salary level or only occasionally
work overtime. If, for example, decisions can be quickly made for half of a
business' affected employees, then that leaves two hours or more per employee
for employers to consider how to respond with regard to employees requiring more
consideration.

Third, the Department believes that most, if not all, entities have at least
some nonexempt employees and, therefore, already have policies and systems in
place for monitoring and recording their hours. The Department believes that
applying those same policies and systems to the workers whose exemption status
changes will, on average, not require more than 10 minutes per week per worker
who works overtime in managerial time cost, as employers will rely on policies
such as a policy against working overtime without express approval or a standard
weekly schedule of assigned hours. The Department notes that nearly 70 percent
of affected employees do not work overtime, and another 17 percent who do work
overtime average about an hour of overtime per week; less than 15 percent of
currently exempt employees average 10 or more hours of overtime per week. The
Department therefore disagrees with SBA Advocacy that small entities will “face
vast administrative and operational costs to schedule and track employee hours
to minimize overtime costs.” Consistent with the approach taken in calculating
managerial costs in the 2019 rule,[439] the Department believes that an average
of 10 additional minutes per week managing the hours of each newly exempt worker
who works overtime is appropriate.

SBA Advocacy bases its claim that the Department underestimated payroll costs on
reports from “[r]oundtable participants” of “much higher payroll costs,”
pointing to four businesses—“an Arkansas restaurant with four locations” and
three “small amusement businesses”—which claimed they would need to increase
manager salaries from $57,000 to $250,000 to comply with the rule. SBA Advocacy
also provided hypothetical scenarios of potential salary increases that
restaurant employers with currently exempt employees would need to incur to
comply with the proposed rule based on various assumptions. As discussed in
section VII.C.4.iii.c, these anecdotal reports and hypothetical examples do not
have any information on the actual amount of overtime work being performed by
employees who could become newly nonexempt under the new salary level. The
Department expects that businesses that would be faced with large increases in
payroll costs if they were to increase salaries to the new threshold would
instead find other responses more economically feasible, such as limiting the
number of overtime hours worked by nonexempt workers.

Moreover, as explained above, the majority of affected workers who work no
overtime or minimal overtime will likely receive little additional pay as a
result of the rule. While some employers might have to pay the overtime premium,
when combined with the 85 percent of affected employees who will receive little
or no overtime pay premium because they work little or no overtime, the average
pay raise over all affected employees and their employers will be much smaller
than the examples presented in SBA Advocacy's comment.

SBA Advocacy stated that small firms have expressed the sentiment that they
would have to fire and not promote employees and limit hours worked as a result
of the rule, after recent inflation, supply chain disruptions, shutdowns and
tight labor markets that followed the COVID-19 pandemic. The Department
acknowledges that the economic climate has been difficult to navigate since the
start of 2020. However, most indications are that the economy has been returning
to long run growth patterns with subsiding inflation. For example, a report by
Van Nostrand and Sinclair (2023) [440] from the U.S. Department of the Treasury
indicates that the United States has seen a strong GDP recovery and was on track
during 2023 to recover to levels predicted before the pandemic. Similarly,
reflecting improvements in inflation and personal incomes, the Survey of
Consumers from the University of Michigan reported that consumer sentiment in
January 2024 grew by 13 percent and reached its highest level since July
2021.[441] To the extent that labor markets remain tight, that might be a
reflection of significant, potentially long-run changes in factors such as long
run labor force participation rates.[442] Regardless, Start Printed Page 32946
workers affected by this rule compose a relatively small part of the overall
labor market and the increase in wages should be relatively small ( see e.g.,
estimated transfers per worker, Table 23). While small businesses may be more
affected by labor market turmoil, the overall size of the impact of this rule on
the economy would indicate that it is unlikely that the rule will have a
significant impact on this market turmoil.

SBA Advocacy also stated that it believes that the Department underestimated the
impact of the proposed rule on small nonprofit organizations, citing examples of
small nonprofits that estimate costs above the one to three percent of revenue
threshold, a measure for determining the economic impact on small entities from
SBA Advocacy's RFA compliance guide. The Department disagrees that it
underestimated the impact of this rule on small nonprofits. First, many
nonprofits are non-covered enterprises because when determining enterprise
coverage, only revenue derived from business operations, not charitable
activities, is included. However, as discussed in section VII.B.3, the
Department nonetheless included workers employed by enterprises that do not meet
the enterprise coverage requirements in its estimate of workers subject to the
FLSA, since there is no data set that would adequately inform an estimate of the
size of this worker population in order to exclude them from these
estimates.[443] Second, for the reasons stated above, the Department believes
that expected costs and payroll impacts of the rule cited by SBA Advocacy and
other commenters are overestimates, and that the Department's estimates are more
accurate reflections of costs and impacts. The Department finds that even if all
employees at a small entity, whether for-profit or nonprofit, are exempt—an
unlikely scenario—then cost and increased payroll combined comprise about one
percent of payroll per affected small entity, and therefore an even smaller
percentage of revenues. See Table 32. SBA Advocacy cited concerns about the
rule's effect on seasonal businesses raised by a representative from America
Outdoors Association, which asserted that many affected employees in seasonal
recreational businesses work nontraditional work schedules that would make it
difficult to reclassify them as hourly workers, as well as a concern raised by a
representative of the Independent Community Bankers Association of America that
the rule could cause its members to reduce services in “rural or less profitable
areas.” The Department reiterates that employers do not need to reclassify
nonexempt workers as hourly employees; they merely need to pay an overtime
premium for hours worked over 40 in a workweek. While there will be affected
workers in the finance sector, the Department believes that costs and transfers
for small entities in the finance sector will be manageable as a share of
payroll and of total revenue.[444]

SBA Advocacy further stated that the IRFA “does not consider the non-financial
consequences to reclassify workers, such as the effect on worker flexibility,
worker morale, and loss of benefits and career advancement.” The Department
addresses these and other possible impacts that cannot be quantified in sections
V.B.4.v and VII.C.3.v. In addition, the Department believes that while
individual experiences vary, the rule will benefit employees in a variety of
ways ( e.g., through increased earnings and an increase in personal time for
some affected workers).

Exempt workers may enjoy more scheduling flexibility because their hours are
less likely to be monitored than nonexempt workers. If so, the final rule could
impose costs on newly nonexempt, overtime-eligible workers by, for example,
limiting their ability to adjust their schedules to meet personal and family
obligations. However, employers can continue to offer flexible schedules and
require workers to monitor their own hours and to follow the employers'
timekeeping rules. Additionally, some exempt workers already monitor their hours
for billing purposes. For these reasons, and because there is little data or
literature on these costs, the Department did not quantify potential costs
regarding scheduling flexibility. Further, a study by Lonnie Golden [445] using
data from the General Social Survey (GSS) found that “[i]n general, salaried
workers at the lower (less than $50,000) income levels don't have noticeably
greater levels of work flexibility that they would `lose' if they became more
like their hourly counterparts.”

Some of the workers who become nonexempt as a result of the final rule and whose
pay is changed by their employer from salaried to hourly status may have
preferred to remain salaried. As noted above in section VII.C.3.v, research has
shown that salaried workers are more likely than hourly workers to receive
benefits such as paid vacation time and health insurance,[446] and are more
satisfied with their benefits.[447] Additionally, when employer demand for labor
decreases, hourly workers tend to see their hours cut before salaried workers,
making earnings for hourly workers less predictable.[448] However, this
literature generally does not control for differences between salaried and
hourly workers such as education, job title, or earnings; therefore, this
correlation is not necessarily attributable to hourly status.

If workers are reclassified as hourly, and hourly workers have fewer benefits
than salaried workers, reclassification could reduce workers' benefits. But the
Department notes that these newly nonexempt workers may continue to be paid a
salary, as long as that salary is equivalent to a base wage at least equal to
the minimum wage rate for every hour worked, and the employee receives a 50
percent premium on that base wage for any overtime hours each week. Similarly,
employers may continue to provide these workers with the same level of benefits
as previously, whether paid on an hourly or salary basis. While reducing
benefits may be one way for employers to offset payroll increases associated
with this rule, as shown below, the Department estimates that costs and payroll
increases for small, affected firms are less than 0.9 percent of payroll and
less than 0.2 percent of estimated revenues. Therefore, the Department does
anticipate that it will be necessarily for a significant number of employers to
reduce employee benefits. Start Printed Page 32947

Finally, it is unclear why career advancement will be inhibited. As noted above,
see section VII.C.3.v., nothing in this rule requires employers to limit
advancement opportunities for newly nonexempt workers. The Department notes that
if an employer believes that career advancement opportunities such as training
are sufficiently important, it can ensure employees attend the trainings during
their 40-hour workweek or pay the overtime premium where training attendance
causes the employee to work over 40 hours in a workweek.

SBA Advocacy stated that the IRFA was incomplete “because it d[id] not analyze
any regulatory alternatives that would minimize the impact of the rule for small
businesses, such as lower salary levels.” However, the Department considered
several regulatory alternatives in the NPRM, describing both the alternatives it
considered, which included lower (and higher) thresholds for the standard salary
level and HCE total compensation requirement, and why it chose the earnings
thresholds it proposed.[449] And it has considered and analyzed multiple
regulatory alternatives, including lower (and higher) thresholds for the
standard salary and HCE total compensation requirement, in this final rule as
well.[450]

SBA Advocacy recommended that the Department issue a Supplemental Regulatory
Flexibility Analysis to be published in the Federal Register for public comment
addressing compliance costs in and after the first year, compliance costs by
different sized small entities, the current business environment, impacts to
small nonprofits, the non-financial consequences of the rule, and the impacts of
adopting alternative salary thresholds on different sizes of small businesses.
The Department disagrees with SBA Advocacy that this rulemaking should be
delayed for this reason. The Department provided a fully robust and transparent
analysis of estimated impacts on small entities in its IRFA, relying on largely
the same methods and assumptions the Department employed in drafting the IFRA in
its 2019 rulemaking.

As the Department stated in the IRFA, it is difficult to directly evaluate
compliance cost impacts by entity size due to lack of data concerning the
distribution of affected workers by entity size. There are fewer affected
workers than there are small entities. Therefore, many small entities will
employ zero affected workers; small entities that do employ affected workers may
employ one affected worker, or have nearly all workers affected, and anywhere in
between. The number of small entities that employ affected workers will be
inversely related to the number of affected employees per entity; if small
entities only employ one affected worker, more entities will be affected, and
vice versa.

Therefore, the Department evaluated a range of potential impacts from lowest to
highest depending on whether one or all employees are affected. Furthermore, the
Department evaluated the impact of regulatory compliance costs plus increased
wages as a percent of payroll. Payroll is largely proportionate to the number of
employees at the firm; if one entity has 10 times as many employees as another,
its payroll is likely to be 10 times larger. Similarly, if an entity has 10
times more affected employees than another firm, then it will likely incur 10
times more compliance cost and wage impacts. Finally, firms hire more workers to
increase production and sales, so entity revenues will be a multiple of payroll,
although that multiple might vary by industry. If compliance costs and increased
wages comprise 2 percent of payroll, those costs will comprise less than 2
percent of revenues. Thus, regardless of the size of the small entity,
regulatory impacts should fall within the range calculated by the Department.

The Department shows in Table 34 that with the exception of the accommodation
and the food services and drinking places industries, if all employees at an
entity are affected by the rule, compliance cost and increased wages comprise
less than 1.5 percent of payroll and substantially less than 1 percent of
revenues per affected small entity. Although compliance costs and increased
wages might comprise 3.55 percent of payroll in the food services and drinking
places industry, that is about 1.10 percent of revenues. Performing this
analysis for different sized firms should not appreciably change these results.

SBA Advocacy also recommended adopting a lower standard salary level that
considers the significant small business impacts of the rule. The comment
proposed two alternatives: retain the current standard salary threshold, or
“adjust[ ] the standard salary threshold by a particular industry sector that
will experience the greatest economic costs,” noting that the 2019 standard
salary level was based on earnings in both the lowest-wage Census region and the
retail industry. The comment also stated that small entities at SBA Advocacy's
roundtable recommended a gradual or phased increase in the standard salary
threshold.

Although SBA Advocacy disagreed with the standard salary level selected by the
Department, the salary level accounts for regions and industries likely to be
most affected by the rule. As discussed above,[451] the Department is setting
the final rule standard salary level using the lowest-wage Census Region,
instead of a national level, ensuring the salary level is not driven by earnings
in high- or even middle-wage regions of the country. The Department believes
that using earnings data from the lowest-wage Census Region produces a salary
level that accounts for differences across industries and regional labor
markets. The Department thus believes that the standard salary level is
appropriate for small businesses.

Consistent with the history of the part 541 regulations, the Department also
declines to create a lower salary level requirement for employees employed at
small entities, or to exclude such employees from the salary level test. As the
Department has previously noted, while “the FLSA itself does provide special
treatment for small entities under some of its exemptions . . . the FLSA's
statutory exemption for white-collar employees in section 13(a)(1) contains no
special provision based on size of business.” [452] In the 86-year history of
the part 541 regulations defining the EAP exemption, the salary level
requirements have never varied according to the size or revenue of the
employer.[453]

SBA Advocacy recommended that updates to the standard salary threshold be made
once every 4 years through a proposed rule with a notice and comment process for
each update, as opposed to updating the standard salary level every three years
through the proposed updating mechanism. The comment conveyed skepticism
regarding the lawfulness of the Department's proposed updating mechanism
asserting that the FLSA requires the Department to periodically issue
regulations to set the standard salary level. The comment also expressed concern
that the updating provision would drive wage inflation for salaried workers
because employers Start Printed Page 32948 may raise the salaries of their newly
nonexempt workers to keep them exempt or move them to hourly work to comply with
the rule, thereby causing “a self-perpetuating threshold, as the salary level of
the 35th percentile would grow each iteration or three years.” The comment
reported small businesses at Advocacy's roundtable opposed the proposed updating
mechanism “because it creates steep and unpredictable changes to the EAP
exemption and uncertainty for employers[,]” and asserted that small entities
have highlighted the administrative burdens of reclassifying workers and
tracking employee hours. The comment also mentioned the concern from small
construction and professional services businesses about difficulties setting
price structures on long term federal and private contracts.

The Department disagrees with SBA Advocacy's skepticism regarding the lawfulness
of the updating mechanism. As explained in section V.A.3.i, the Department is
adopting an updating mechanism in this rulemaking after publishing a notice of
the proposed rule and providing opportunity for stakeholders to comment in
accordance with the appropriate notice and comment requirements. The Department
has received and considered numerous comments on the proposed updating
mechanism. Future updates under the triennial updating mechanism would simply
reset the thresholds by applying current data to a standard already established
by regulation. Therefore, the Department disagrees with the assertion that a
notice and comment rulemaking must precede each future update made through the
updating mechanism even where the methodology for setting the compensation
levels and the mechanism for updating those levels would remain unchanged.

The Department also disagrees with the concern that the updating mechanism would
result in rapid increases to the salary level solely because of employers'
actions in response to the rule. This assertion is akin to the ones made by a
number of other commenters that the updating mechanism tied to a fixed
percentile would lead to the salary level being ratcheted upward over time due
to the resulting actions of employers. As explained in detail in sections
V.A.3.iii and VII.C.9, there is nothing to substantiate this assertion. On the
contrary, the Department's analyses shows that employers' actions in response to
the rule will not have the asserted impact on future updates. Rather, the
updating mechanism will only ensure that the salary level continues to reflect
prevailing economic conditions.

The Department also finds unpersuasive the assertion that the updating mechanism
will lead to unpredictable changes and uncertainty for employers. Unlike
irregular updates to the earnings thresholds, which may result in drastic
changes to the thresholds, regular updates on a pre-determined interval and
using an established methodology will produce more predictable and incremental
changes. Through the updating mechanism, the Department will reset the standard
salary level and total annual compensation threshold using the most recent,
publicly available, BLS data on earnings for salaried workers. Therefore,
employers will be able to track where the thresholds would fall on a quarterly
basis by looking at the BLS data and can estimate the changes in the thresholds
even before the Department publishes the notice with the adjusted thresholds in
the Federal Register . The Department believes that, compared to the irregular
updates of the past, employers will be better positioned to anticipate and
prepare for future updates under the updating mechanism.

SBA Advocacy also referenced that the Department must publish a small entity
compliance guide for this rule. Pursuant to its obligations under section 212 of
SBREFA, the Department will publish a small entity compliance guide for this
rule.

SBA Advocacy recommended the Department add provisions to help small nonprofits
comply with the rule, due to difficulties renegotiating government grants and
contracts. As explained in section II.D, issues directly related to the public
financing available for certain employers that might be affected by this final
rule are beyond the Department's authority to address. However, the Department
intends to issue technical assistance to help employers comply with the FLSA.

Finally, SBA Advocacy recommended an extended effective date for the rule of at
least 1 year or 18 months, as small entities indicated needing “more time to
understand and evaluate the rule, and possibly reclassify their workforce and
budget for expenditures.” As discussed in section IV, having considered
commenter feedback in response to the NPRM, the Department has determined that a
delayed applicability date is appropriate for the new standard salary level and
the HCE total annual compensation threshold. Specifically, the new $1,128 per
week standard salary level and $151,164 per year HCE total annual compensation
threshold will not be applicable until approximately 8 months after publication
of this final rule in the Federal Register . The Department will initially
update those thresholds on July 1, 2024, by reapplying the methodologies used to
set those thresholds in the 2019 rule, resulting in an initial salary level of
$844 per week and an initial HCE total annual compensation threshold of $132,964
per year. Those initial thresholds will remain in effect until the higher
thresholds become applicable.

C. SIGNIFICANT ISSUES RAISED BY PUBLIC COMMENTS IN RESPONSE TO THE INITIAL
REGULATORY FLEXIBILITY ANALYSIS

Many of the issues raised by small businesses in the public comments received on
the proposed rule are described in the preamble and RIA above, which are
incorporated herein. Nevertheless, significant issues raised by representatives
of small businesses are also addressed here.

Most of the comments received concerning small businesses centered on the burden
that the proposed salary level would impose on small entities. Many such
commenters emphasized that rule-related costs would detrimentally impact small
businesses. See, e.g., Amusement and Music Operators Association; Independent
Women's Forum; NSBA. Some commenters specifically asserted that the Department
underestimated compliance costs for small entities under the proposed rule. See,
e.g., ABC; The 4A's. For example, NFIB contended that the rule could cost small
businesses more than large businesses because, among other reasons, small
businesses often have fewer resources (such as administrative staff members,
experienced human resources personnel, or regular access to legal counsel).
Sixteen Members of the U.S. House of Representatives cited rule-related costs,
combined with burdens facing small businesses, in urging the Department to
withdraw its proposal. A number of small businesses specifically raised concerns
about the impact of the proposed salary level on small entities in low-wage
regions and industries. See, e.g., Nebraska Bankers Association; National
Restaurant Association. Other commenters, including the Job Creators Network
Foundation, expressed concern that the rule would adversely impact small
businesses by increasing inflation. Some small businesses, raising these and
similar concerns, urged the Department to set a special salary level or create
an exemption for small businesses. See, e.g., Bowling Proprietors Association of
America; WFCA. Opposition was not uniform, Start Printed Page 32949 however, as
some small businesses supported the proposed rule. See, e.g. A Few Cool Hardware
Stores; BA Auto Care; Well-Paid Maids.

For the reasons previously discussed in detail, the Department believes its cost
estimates are appropriate and do not provide a basis for changing the
methodology used to set the salary level or for abandoning this rulemaking
altogether. The Department does not agree with those commenters who asserted
that the proposal would be ruinous for small businesses. As shown later in this
section, Department's upper bound estimate of the impact of this rule per small
establishment (which assumed all employees in a small firm are affected by the
new rule) shows that costs and payroll increases for small affected firms were
less than 0.9 percent of payroll and less than 0.2 percent of estimated
revenues. While the affect in some industries will be somewhat larger, these
figures reinforce that this rule will not be unduly burdensome for small
businesses. In addition, the Department believes that most, if not all, small
businesses, like larger businesses, employ a mix of exempt and
overtime-protected workers. As such, to the extent cost concerns are tied in
part to small businesses reclassifying some employees who become nonexempt as
hourly as a result of this rule, many employers will already have policies and
systems in place for scheduling workers and monitoring overtime hours worked and
the corresponding overtime premium pay. Such established procedures, and
experience gained through fairly recent rulemakings to increase the earnings
thresholds, may help mitigate concerns related to small businesses requiring
substantial assistance from outside professionals to comply with this final
rule. Additionally, the Department intends to publish compliance assistance
materials, including a small entity compliance guide. Industry associations also
typically become familiar with rulemakings such as this one and often provide
compliance assistance to association members. As to inflationary concerns, as
previously discussed, the Department does not expect its rule to lead to
increased inflation on a national level.

The Department recognizes that many small employers operate in low-paying
regions or industries, and the Department has historically accounted for small
employers when setting the salary level.[454] This final rule is no exception,
as the Department is setting the salary level using the lowest-wage Census
Region. The Department declines to adopt special exceptions or lower salary
levels for small businesses. As stated above and as the Department has
emphasized in past rules, “`the FLSA's statutory exemption for white-collar
employees in section 13(a)(1) contains no special provision based on size of
business.' ” [455] In the 86-year history of the part 541 regulations defining
the EAP exemption, the Department has never adopted special salary levels for
small businesses. The Department continues to believe that implementing
differing salary levels based on business size industry-by-industry would be
inadvisable because, among other reasons, it “would present the same
insurmountable challenges” as adopting regional or population-based salary
levels.[456]

The Department received many comments in response to its proposed mechanism to
update the standard salary and HCE total annual compensation requirements. As
discussed in section V.A.3.i, some commenters asserted that the proposed
updating mechanism would violate the RFA. Commenters, including Independent
Electrical Contracts, RILA, and Seyfarth Shaw, commented that the RFA required
the Department “to undertake a detailed economic and cost analysis” and that
Department's proposed updating mechanism would bypass these requirements. The
RFA requires a regulatory flexibility analysis to accompany any agency final
rule promulgated under 5 U.S.C. 553.[457] In accordance with this requirement,
this section estimates the costs of future triennial updates using the fixed
percentile method. The RFA only requires that such analyses accompany
rulemaking, and commenters did not cite any RFA provision that would require the
Department to conduct a new regulatory flexibility analysis before each
scheduled update to the salary and annual compensation thresholds.

Several commenters addressed the potential effects that the proposed updating
mechanism could have on small entities. Small Business Majority expressed
support for the proposed updating mechanism, asserting that “[s]maller,
predictable increases that are known well in advance will allow small business
owners to be better prepared for any staffing or compensation changes they need
to make.” Business for a Fair Minimum Wage—whose members include many small
business owners—commented that the proposed updating mechanism would keep the
thresholds up to date and predictable for employers. In contrast, NFIB asserted
that “triennial updates would result in instability in labor and administrative
costs for small businesses in perpetuity” as small businesses would have to
reconsider the classifications given to their employees every 3 years. The 4As
similarly asserted that the updating mechanism imposes substantial ongoing
expense on small agencies noting that “[l]ike many small businesses, small
agencies often outsource legal, payroll, and some HR functions to outside
professionals.” ASTA expressed concern that “small business owners with limited
resources to engage outside help, would have difficulty keeping abreast of
salary level increases and could inadvertently find themselves out of
compliance.”

As previously explained, the Department believes the updating mechanism adopted
by this final rule will ensure greater certainty and predictability for the
regulated community. For all future triennial updates, the Department will
publish a notice with the revised salary and annual compensation thresholds not
fewer than 150 days before the new thresholds are set to take effect. Moreover,
businesses will be able to estimate the changes in the thresholds by looking at
BLS data even before the Department publishes the notice with the adjusted
thresholds. The Department believes that, compared to the irregular updates of
the past, employers will be better positioned to anticipate and prepare for
future updates under the updating mechanism. As noted in section V.A.3.ii, the
alternative to Department's updating mechanism is not a permanent fixed earnings
threshold, but instead larger changes to the threshold that would occur during
irregular future updates. Since the updating mechanism will change the
thresholds regularly and incrementally, and based on actual earnings of salaried
workers, the Department predicts that employers will be in a better position to
be able to adjust to the changes resulting from triennial updates.

The Department believes that the updating mechanism will ensure that the
earnings thresholds for the EAP exemption will remain effective and up to date
over time. The updating mechanism should benefit employers of Start Printed Page
32950 all sizes going forward by avoiding the uncertainty and disruptiveness of
larger increases that would likely occur as a result of irregular updates.

D. ESTIMATE OF THE NUMBER OF AFFECTED SMALL ENTITIES

1. DEFINITION OF SMALL ENTITY

The RFA defines a “small entity” as (1) a small not-for-profit organization, (2)
a small governmental jurisdiction, or (3) a small business. The Department used
the entity size standards defined by SBA and in effect as of 2019, to classify
entities as small or large.[458] The most recent size standards were released in
2022 and use the 2022 NAICS. However, because the data used by the Department to
estimate the number of small entities uses the 2017 NAICS, the Department used
the 2019 entity size standards instead of the 2022 standards.[459]

SBA establishes standards for 6-digit NAICS industry codes, and standard size
cutoffs are typically based on either the average number of employees or average
annual receipts. However, some exceptions exist, the most notable being that
depository institutions (including credit unions, commercial banks, and
non-commercial banks) are classified by total assets and small governmental
jurisdictions are defined as areas with populations of less than 50,000.[460]

2. NUMBER OF SMALL ENTITIES AND EMPLOYEES

The primary data source used to estimate the number of small entities and
employment in these entities is the Statistics of U.S. Businesses (SUSB).
Alternative sources were used for industries with asset thresholds (credit
unions,[461] commercial banks and savings institutions,[462] agriculture [463]
), and public administration.[464] The Department used 2017 data, when possible,
to align with the use of 2017 SUSB data. Private households are excluded from
the analysis due to lack of data.

For each industry, the SUSB 2017 tabulates employment, establishment, and firm
counts by both enterprise employment size ( e.g., 0-4 employees, 5-9 employees)
and receipt size ( e.g., less than $100,000, $100,000-$499,999).[465] Although
more recent SUSB data are available, these data do not disaggregate entities by
revenue sizes. The Department combined these data with the SBA size standards to
estimate the proportion of firms and establishments in each industry that are
considered small, and the proportion of workers employed by a small entity. The
Department classified all firms and establishments and their employees in
categories below the SBA cutoff as small.[466] If a cutoff fell in the middle of
a category, the Department assumed a uniform distribution of employees across
that bracket to determine what proportion of establishments should be classified
as small.[467] The estimated share of establishments that were small in 2017 was
applied to the more recent 2021 SUSB data on the number of small establishments
to determine the number of small entities.[468]

The Department also estimated the number of small establishments and their
employees by employer type (nonprofit, for-profit, government). This calculation
is similar to the calculation of the number of establishments by industry but
with different data. Instead of using data by industry, the Department used SUSB
data by Legal Form of Organization for nonprofit and for-profit establishments.
The estimated share of establishments that were calculated as small with the
2017 data was then applied to the 2021 SUSB counts. For governments, the
Department used the number of governments reported in the 2017 Census of
Governments.[469]

Table 28 presents the estimated number of establishments/governments and small
establishments/governments in the U.S. (hereafter, referred to as
“entities”).[470] The numbers in the following tables are for Year 1; projected
impacts are considered later. The Department found that of the 8.2 million
entities, 80 percent (6.6 million) are small by SBA standards. These small
entities employ 55.3 million workers, about 37 percent of workers (excluding
self-employed, unpaid workers, and members of the armed forces). They also
account for roughly 35 percent of total payroll ($3.7 trillion of $10.7
trillion).[471]

Although the Department used 6-digit NAICS to determine the number of small
entities and the associated number of employees, the following tables aggregate
findings to 27 industry categories. This was the most detailed level available
while maintaining adequate sample sizes.[472] The Department started with the
51-industry breakdown and aggregated where necessary to obtain adequate sample
sizes.

TABLE 28—NUMBER OF ENTITIES AND EMPLOYEES BY SBA SIZE STANDARDS, BY INDUSTRY AND
EMPLOYER TYPE

Start Printed Page 32951

Start Printed Page 32952

Estimates are not limited to entities subject to the FLSA because the Department
cannot estimate which enterprises do not meet the enterprise coverage
requirements because of data limitations. Although not excluding such entities
and associated workers only affects a small percentage of workers generally, it
may have a larger effect (and result in a larger overestimate) for non-profits,
because revenue from charitable activities is not included when determining
enterprise coverage.

3. NUMBER OF AFFECTED SMALL ENTITIES AND EMPLOYEES

The calculation of the number of affected EAP workers was explained in detail in
section VII.B. Here, the Department focuses on how these workers were allocated
to either small or large entities. To estimate the probability that an exempt
EAP worker in the CPS data is employed by a small entity, the Department assumed
this probability is equal to the proportion of all workers employed by small
entities in the corresponding industry. That is, if 50 percent of workers in an
industry are employed in small entities, then on average small entities are
expected to employ one out of every two exempt EAP workers in this
industry.[473] The Department applied these probabilities to the population of
exempt EAP workers to find the number of workers (total exempt EAP workers and
total affected by the rule) that small entities employ. No data are available to
determine whether small businesses (or small businesses in specific industries)
are more or less likely than non-small businesses to employ exempt EAP workers
or affected EAP workers. Therefore, the best assumption available is to assign
the same rates to all small and non-small businesses.[474 475]

The Department estimated that small entities employ 1.6 million of the 4.3
million affected workers (36.3 percent) (Table 29). This composes 2.8 percent of
the 55.3 million workers that small entities employ. The sectors with the
highest total number of affected workers employed by small entities are
professional and technical services (281,000); health care services, except
hospitals (140,000); and retail trade (125,000). The sectors with the largest
percent of workers employed by small entities who are affected include: Start
Printed Page 32953 insurance (7.0 percent); membership associations and
organizations (5.7 percent); and professional and technical services (5.3
percent).

TABLE 29—NUMBER OF AFFECTED WORKERS EMPLOYED BY SMALL ENTITIES, BY INDUSTRY AND
EMPLOYER TYPE

Start Printed Page 32954

Because no information is available on how affected workers would be distributed
among small entities, the Department estimated a range of effects. At one end of
this range, the Department assumed that each small entity employs no more than
one affected worker, meaning that at most 1.6 million of the 6.6 million small
entities will employ an affected worker. Thus, these assumptions provide an
upper-end estimate of the number of affected small entities. (However, it
provides a lower-end estimate of the effect per small entity because costs are
spread over a larger number of entities; the impacts experienced by an entity
would increase as the share of its workers that are affected increases.) For the
purpose of estimating a lower-range number of affected small entities, the
Department used the average size of a small entity as the typical size of an
affected small entity, and assumed all workers are affected. This can be
considered an approximation of all employees at an entity affected.[476] The
average number Start Printed Page 32955 of employees in a small entity is the
number of workers that small entities employ divided by the total number of
small establishments in that industry. The number of affected employees at small
businesses is then divided by this average number of employees to calculate
208,300 affected small entities.

Table 30 summarizes the estimated number of affected workers that small entities
employ and the expected range for the number of affected small entities by
industry. The Department estimated that the rule will affect 1.6 million workers
who are employed by somewhere between 208,300 and 1.6 million small entities;
this comprises from 3.2 percent to 23.9 percent of all small entities. It also
means that from 5.0 million to 6.4 million small entities would incur no more
than minimal regulatory familiarization costs ( i.e., 6.6 million minus 1.6
million equals 5.0 million; 6.6 million minus 208,300 equals 6.4 million, using
rounded values). The table also presents the average number of affected
employees per establishment using the method in which all employees at the
establishment would be affected. For the other method, by definition, there
would always be one affected employee per establishment. Also displayed is the
average payroll per small establishment by industry (based on both affected and
non-affected small entities), calculated by dividing total payroll of small
businesses by the number of small businesses (Table 28) (applicable to both
methods).

Start Printed Page 32956

TABLE 30—NUMBER OF SMALL AFFECTED ENTITIES AND EMPLOYEES BY INDUSTRY AND
EMPLOYER TYPE

Start Printed Page 32957

4. IMPACTS TO AFFECTED SMALL ENTITIES

For small entities, the Department estimated various types of effects, including
regulatory familiarization costs, adjustment costs, managerial costs, and
payroll increases borne by employers. The Department estimated a range for the
number of affected small entities and the impacts they incur. While the upper
and lower bounds are likely over- and under-estimates, respectively, of effects
per small entity, the Department believes that this range of costs and payroll
increases provides the most accurate characterization of the effects of the rule
on small employers.[477] Furthermore, the smaller estimate of the number of
affected entities ( i.e., where all employees at each affected employer are
assumed to be affected) will result in the largest costs and payroll increases
per entity as a percent of establishment payroll and revenue, and the Department
expects that many, if not most, entities will incur smaller costs, payroll
increases, and effects relative to entity size.

Parameters that are used in the small business cost analysis for Year 1 are
provided in Table 31, along with summary data of the impacts.[478]

Start Printed Page 32958

TABLE 31—OVERVIEW OF PARAMETERS USED FOR COSTS TO SMALL BUSINESSES AND THE
IMPACTS ON SMALL BUSINESSES

The Department expects total direct employer costs will range from $368.7
million to $443.6 million for affected small entities ( i.e., those with
affected employees) in the first year (an average cost of between $282 to $1,771
per entity) (Table 32). Small entities that do not employ affected workers will
incur $274.9 million to $349.7 million in regulatory familiarization costs (an
average cost of $54.82 per entity). The three industries with the highest costs
(professional and technical services; health care services, except hospitals;
and retail trade) account for about 35 percent of the costs. Hospitals are
expected to incur the largest cost per establishment ($42,900 using the method
where all employees are affected), although the costs are not expected to exceed
0.3 percent of payroll. The food services and drinking places industry is
expected to experience the largest effect as a share of payroll (estimated
direct costs compose 0.69 percent of average entity payroll).

Start Printed Page 32959

TABLE 32—YEAR 1 SMALL ESTABLISHMENT DIRECT COSTS, TOTAL AND PER ESTABLISHMENT,
BY INDUSTRY AND EMPLOYER TYPE

Start Printed Page 32960

It is possible that the costs of the rule may be disproportionately large for
small entities, especially because small entities often have limited human
resources personnel on staff. However, the Department expects that small
entities would rely on compliance assistance materials provided by the
Department or industry associations to become familiar with the final rule.
Additionally, the Department notes that the rule is narrow in scope because the
changes all relate to the salary component of the part 541 regulations. Finally,
the Department believes that most entities have at least some nonexempt
employees and, therefore, already have policies and systems in place for
monitoring and recording their hours. The Department believes that applying
those same policies and systems to the workers whose exemption status changes
will not be an unreasonable burden on small businesses.

Average weekly earnings for affected EAP workers in small entities are expected
to increase by about $7.06 per week per affected worker, using the incomplete
fixed-job model [479] described in section VII.C.4.iii.[480] This would lead to
$577.5 million in additional annual wage payments to employees in small entities
(less than 0.5 percent of aggregate affected establishment payroll; Table 33).
The largest payroll increases per establishment are expected in utilities (up to
$15,500 per entity); hospitals (up to $14,300 per entity); and
manufacturing—durable goods (up to Start Printed Page 32961 $13,000 per entity).
However, average payroll increases per entity would exceed one percent of
average annual payroll in only two sectors: food services and drinking places
(2.9 percent) and accommodation (1.1 percent).

TABLE 33—YEAR 1 SMALL ESTABLISHMENT PAYROLL INCREASES, TOTAL AND PER
ESTABLISHMENT, BY INDUSTRY AND EMPLOYER TYPE

Start Printed Page 32962

Table 34 presents estimated first year direct costs and payroll increases
combined per entity and the costs and payroll increases as a percent of average
entity payroll. The Department presents only the results for the upper bound
scenario where all workers employed by the entity are affected. Combined costs
and payroll increases per establishment range from $1,800 in insurance to
$57,200 in hospitals. Combined costs and payroll increases compose more than two
percent of average annual payroll in one sector, food services and drinking
places (3.6 percent).

However, comparing costs and payroll increases to payrolls overstates the
effects on entities because payroll represents only a fraction of the financial
resources available to an establishment. The Department approximated revenue per
affected small establishment by calculating the ratio of small business revenues
to payroll by industry from the 2017 SUSB data then multiplying that ratio by
average small entity payroll.[481] Using this approximation of annual revenues
as a benchmark, only one sector will have costs and payroll increases amounting
to greater than one percent of revenues, food services and drinking places (1.1
percent).

Start Printed Page 32963

TABLE 34—YEAR 1 SMALL ESTABLISHMENT DIRECT COSTS AND PAYROLL INCREASES, TOTAL
AND PER ENTITY, BY INDUSTRY AND EMPLOYER TYPE, USING ALL EMPLOYEES IN ENTITY
AFFECTED METHOD

Start Printed Page 32964

5. PROJECTED EFFECTS TO AFFECTED SMALL ENTITIES IN YEAR 2 THROUGH YEAR 10

To determine how small businesses would be affected in future years, the
Department projected costs to small businesses for 9 years after Year 1 of the
rule. Projected employment and earnings were calculated using the same
methodology described in section VII.B.3. Affected employees in small firms
follow a similar pattern to affected workers in all entities: the number
decreases gradually between automatic update years, and then increases. There
are 1.6 million affected workers in small entities in Year 1 and 2.2 million in
Year 10. Table 35 reports affected workers in these 2 years only.

Start Printed Page 32965

TABLE 35—PROJECTED NUMBER OF AFFECTED WORKERS IN SMALL ENTITIES, BY INDUSTRY

Direct costs and payroll increases for small entities vary by year but generally
decrease between updates as the real value of the salary and compensation levels
decrease and the number of affected workers consequently decreases. In updating
years, costs will increase due to newly affected workers and some regulatory
familiarization costs. Direct costs and payroll increases for small businesses
will increase in Year 10 (an automatic update year) compared to Year 1, $946
million in Year 1 and $1.3 billion in Year 10 (Table 36 and Figure 10).

Start Printed Page 32966

TABLE 36—PROJECTED DIRECT COSTS AND PAYROLL INCREASES FOR AFFECTED SMALL
ENTITIES, BY INDUSTRY, USING ALL EMPLOYEES IN ENTITY AFFECTED METHOD

Start Printed Page 32967

FIGURE 10—10-YEAR PROJECTED NUMBER OF AFFECTED WORKERS IN SMALL ENTITIES, AND
ASSOCIATED COSTS AND PAYROLL INCREASES

E. PROJECTED REPORTING, RECORDKEEPING, AND OTHER COMPLIANCE REQUIREMENTS OF THE
RULE

The FLSA sets minimum wage, overtime pay, and recordkeeping requirements for
employment subject to its provisions. Unless exempt, covered employees must be
paid at least the minimum wage and not less than one and one-half times their
regular rates of pay for overtime hours worked.

Pursuant to section 11(c) of the FLSA, the Department's regulations at part 516
require covered employers to maintain certain records about their employees.
Bona fide EAP workers are subject to some of these recordkeeping requirements
but are exempt from others related to pay and hours worked.[482] Thus, although
this rulemaking does not introduce any new recordkeeping requirements, employers
will need to keep some additional records for affected employees who become
newly nonexempt if they do not presently record such information. As indicated
in this analysis, this rule expands minimum wage and overtime pay coverage to
4.3 million affected EAP workers, of which 1.6 million are employed by a small
entity. This will result in an increase in employer burden and was estimated in
the PRA portion (section VI) of this rule.

F. STEPS THE AGENCY HAS TAKEN TO MINIMIZE THE SIGNIFICANT ECONOMIC IMPACT ON
SMALL ENTITIES

This section describes the steps the agency has taken to minimize the economic
impact on small entities, consistent with the stated objectives of the FLSA. It
includes a statement of the factual, policy, and legal reasons for the selected
standard and HCE levels adopted in the rule and why alternatives were rejected.

In this rule, the Department sets the standard salary level equal to the 35th
percentile of earnings of full-time salaried workers in the lowest-wage Census
Region (currently the South). Based on 2023 data, this results in a salary level
of $1,128 per week. This approach will fully restore the salary level's
screening function and, by setting the salary level above the long test salary
level, ensure that fewer lower paid white-collar employees who perform
significant amounts of nonexempt work are included in the exemption. At the same
time, by setting it below the short test salary level, the new salary level
allows employers to continue to use the exemption for many lower paid
white-collar employees who were made exempt under the 2004 standard duties test.
Thus, the Department believes that the new salary level will also more
reasonably distribute between employees and their employers the impact of the
shift from a two-test to a one-test system on employees earning between the long
and short test salary levels. As in prior rulemakings, the Department is not
establishing multiple salary levels based on region, industry, employer size, or
any other factor, which stakeholders have generally agreed would significantly
complicate the regulations.[483] Instead, the Department is setting the standard
salary level using earnings data from the lowest-wage Census Region, in part to
accommodate small employers and employers in low-wage industries.[484]

The Department is setting the HCE total annual compensation level equal to the
85th percentile of earnings of full-time salaried workers nationally ($151,164
annually based on 2023 data). Start Printed Page 32968 The Department believes
that this level avoids costs associated with evaluating, under the standard
duties test, the exemption statuses of large numbers of highly-paid white-collar
employees, many of whom would have remained exempt even under that test, while
providing a meaningful and appropriate complement to the more lenient HCE duties
test. While the threshold is higher than the HCE level adopted in the 2019 rule
(which was set equal to the 80th percentile of earnings for salaried workers
nationwide), the HCE threshold in this rule is lower than the HCE percentile
adopted in the 2004 and 2016 rules, which covered 93.7 and 90 percent of
salaried workers nationwide respectively. The Department further believes that
nearly all of the highly-paid white-collar workers earning above this threshold
“would satisfy any duties test.” [485]

1. DIFFERING COMPLIANCE AND REPORTING REQUIREMENTS FOR SMALL ENTITIES

This rule provides no differing compliance requirements and reporting
requirements for small entities. The Department strives to minimize respondent
recordkeeping burden by requiring no specific form or order of records under the
FLSA and its corresponding regulations. Moreover, employers normally maintain
the records under usual or customary business practices.

2. LEAST BURDENSOME OPTION OR EXPLANATION REQUIRED

The Department believes it has chosen the most effective option that updates and
clarifies the rule and results in the least burden. Among the options considered
by the Department, the least restrictive option was using the 2004 methodology
(the 20th percentile of weekly earnings of full-time nonhourly workers in the
lowest-wage Census region, currently the South, and in retail nationally) to set
the standard salary level, which was also the methodology used in the 2019 rule.
As noted above, however, the salary level produced by the 2004 methodology is
below the long test salary level, which the Department considers to be a key
parameter for determining an appropriate salary level in a one-test system using
the current standard duties test. Using the 2004 methodology thus does not
address the Department's concerns discussed above under Objectives of, and Need
for, the Rule.

Pursuant to section 603(c) of the RFA, the following alternatives are to be
addressed:

I. DIFFERING COMPLIANCE OR REPORTING REQUIREMENTS THAT TAKE INTO ACCOUNT THE
RESOURCES AVAILABLE TO SMALL ENTITIES

The FLSA creates a level playing field for businesses by setting a floor below
which employers may not pay their employees. To establish differing compliance
or reporting requirements for small businesses would undermine this important
purpose of the FLSA. The Department makes available a variety of resources to
employers for understanding their obligations and achieving compliance.
Therefore, the Department is not implementing differing compliance or reporting
requirements for small businesses.

II. THE CLARIFICATION, CONSOLIDATION, OR SIMPLIFICATION OF COMPLIANCE AND
REPORTING REQUIREMENTS FOR SMALL ENTITIES

This rule imposes no new reporting requirements. The Department makes available
a variety of resources to employers for understanding their obligations and
achieving compliance.

III. THE USE OF PERFORMANCE RATHER THAN DESIGN STANDARDS

Under this rule, employers may achieve compliance through a variety of means.
Employers may elect to continue to claim the EAP exemption for affected
employees by adjusting salary levels, hiring additional workers, spreading
overtime hours to other employees, or compensating employees for overtime hours
worked. The Department makes available a variety of resources to employers for
understanding their obligations and achieving compliance.

IV. AN EXEMPTION FROM COVERAGE OF THE RULE, OR ANY PART THEREOF, FOR SUCH SMALL
ENTITIES

Creating an exemption from coverage of this rulemaking for businesses with as
many as 500 employees, those defined as small businesses under SBA's size
standards, is inconsistent with the FLSA, which applies to all employers that
satisfy the enterprise coverage threshold or employ individually covered
employees, regardless of employer size.[486]

IX. UNFUNDED MANDATES REFORM ACT ANALYSIS

The Unfunded Mandates Reform Act of 1995 (UMRA),[487] requires agencies to
prepare a written statement for rulemaking that includes any Federal mandate
that may result in increased expenditures by state, local, and tribal
governments, in the aggregate, or by the private sector, of $200 million ($100
million in 1995 dollars adjusted for inflation to 2023) or more in at least one
year. This statement must (1) identify the authorizing legislation; (2) present
the estimated costs and benefits of the rule and, to the extent that such
estimates are feasible and relevant, present its estimated effects on the
national economy; (3) summarize and evaluate state, local, and tribal government
input; and (4) identify reasonable alternatives and select, or explain the
non-selection, of the least costly, most cost-effective, or least burdensome
alternative. This rule contains unfunded mandates as described below.

A. AUTHORIZING LEGISLATION

This final rule is issued pursuant to section 13(a)(1) of the FLSA, 29 U.S.C.
213(a)(1). The section exempts from the FLSA's minimum wage and overtime pay
requirements “any employee employed in a bona fide executive, administrative, or
professional capacity (including any employee employed in the capacity of
academic administrative personnel or teacher in elementary or secondary
schools), or in the capacity of outside salesman (as such terms are defined and
delimited from time to time by regulations of the Secretary, subject to the
provisions of [the Administrative Procedure Act] . . .).” [488] The requirements
of the exemption are contained in part 541 of the Department's regulations.
Section 3(e) of the FLSA [489] defines “employee” to include most individuals
employed by a state, political subdivision of a state, or interstate
governmental agency. Section 3(x) of the FLSA [490] also defines public agencies
to include the government of a state or political subdivision thereof, or any
interstate governmental agency.

B. COSTS AND BENEFITS

For purposes of the UMRA, this rule includes a Federal mandate that is expected
to result in increased expenditures by the private sector of more than $200
million in at least one year and result in increased expenditures by state,
local and tribal governments, in the aggregate, of $200 million or more in at
least one year. Based on the economic impact analysis of this final rule, the
Department determined that Year 1 costs for state and local governments would
total $197.7 million, of which $98.9 million are direct employer costs and $98.8
Start Printed Page 32969 million are payroll increases (Table 37). In subsequent
years, state and local governments may experience payroll increases of as much
as $183.7 million (in year 10 of the rule).

The Department estimates that the final rule will result in Year 1 costs to the
private sector of approximately $2.7 billion, of which $1.3 billion are direct
employer costs and $1.4 billion are payroll increases.

TABLE 37—SUMMARY OF YEAR 1 IMPACTS BY TYPE OF EMPLOYER

UMRA requires agencies to estimate the effect of a regulation on the national
economy if, at its discretion, such estimates are reasonably feasible and the
effect is relevant and material.[491] However, OMB guidance on this requirement
notes that such macroeconomic effects tend to be measurable in nationwide
econometric models only if the economic effect of the regulation reaches 0.25
percent to 0.5 percent of GDP, or in the range of $68.4 billion to $136.8
billion (using 2023 GDP). A regulation with a smaller aggregate effect is not
likely to have a measurable effect in macro-economic terms unless it is highly
focused on a particular geographic region or economic sector, which is not the
case with this rule.

The Department's RIA estimates that the total first-year costs (direct employer
costs and payroll increases from employers to workers) of the final rule would
be approximately $2.7 billion for private employers and $197.7 million for state
and local governments. Given OMB's guidance, the Department has determined that
a full macro-economic analysis is not likely to show any measurable effect on
the economy. Therefore, these costs are compared to payroll costs and revenue to
demonstrate the feasibility of adapting to these new rules.

Total first-year state and local government costs compose 0.02 percent of state
and local government payrolls.[492] First-year state and local government costs
compose 0.004 percent of state and local government revenues (projected 2023
revenues were estimated to be $5.0 trillion).[493] Effects of this magnitude
will not result in significant disruptions to typical state and local
governments. The $197.7 million in state and local government costs constitutes
an average of approximately $2,200 for each of the approximately 90,126 state
and local entities. The Department considers these costs to be quite small both
in absolute terms and in relation to payroll and revenue.

Total first-year private sector costs compose 0.034 percent of private sector
payrolls nationwide.[494] Total private sector first-year costs compose 0.006
percent of national private sector revenues (revenues in 2023 are projected to
be $45.3 trillion).[495] The Department concludes that effects of this magnitude
are affordable and will not result in significant disruptions to typical firms
in any of the major industry categories.

C. SUMMARY OF STATE, LOCAL, AND TRIBAL GOVERNMENT INPUT

Prior to issuing the NPRM, the Department held a series of stakeholder listening
sessions between March 8, 2022, and June 3, 2022 to gather input on its part 541
regulations. Stakeholders invited to participate in these listening sessions
included representatives from labor unions; worker advocate groups; industry
associations; small business associations; state and local governments; tribal
governments; non-profits; and representatives from specific industries such as
K-12 education, higher education, healthcare, retail, restaurant, manufacturing,
and wholesale. Stakeholders were invited to share their input on issues
including the appropriate EAP salary level, the costs and benefits of increasing
the salary level to employers and employees, the methodology for updating the
salary level and frequency of updates, and whether changes to the duties test
are Start Printed Page 32970 warranted. A listening session was held
specifically for state and local governments on April 1, 2022, and a session for
tribal governments was held on May 12, 2022. The input received at these
listening sessions aided the Department in drafting its rule.

The Department received mixed feedback on the proposed rule from state, local,
and tribal government commenters. Some state and local government stakeholders
voiced strong support for the proposed rule. For example, the Coalition of State
AGs supported the proposal, stating that the current salary level is too low and
that the proposed updating mechanism “is important for employers in our
respective states to have predictability in their labor costs.” The Washington
State Department of Labor & Industries noted that it implemented a state EAP
salary level through administrative rulemaking which is currently $1,302.40 per
week ($67,724.80 annually), stating that “the State of Washington considered
many of the same factors” as the Department to set its salary level. Commenting
on behalf of 1.4 million members who are state and local government employees,
AFSCME described the proposed salary level as “a modest increase that will
nevertheless benefit millions of workers.”

Other state and local government stakeholders voiced opposition to the proposed
rule. The National Association of Counties asserted that the proposed threshold
increases would have a disproportionate impact on small and rural county
governments, emphasizing that practical and legal constraints limit the ability
of county governments to raise revenues to account for added labor costs.
Similarly, Ohio Township Association commented that “[if] townships [do] not
wish to raise taxes or residents reject a property tax levy for such purpose,
the township will be forced to cut or eliminate services.” See also Pennsylvania
State Association of Township Supervisors (providing similar feedback). The
Mississippi State Personnel Board asserted that the proposed rule could
jeopardize Mississippi's use of telework to recruit and retain certain employees
for the state government.

The Department received one comment from a tribal government
stakeholder—Ho-Chuck Inc., a subsidiary of the Winnebago Tribe of Nebraska.
Explaining that it operates various establishments in the gaming and retail
industries, Ho-Chuck Inc. expressed concern about the magnitude of the
Department's proposed increase to the standard salary level and of the NPRM's
proposed 60-day effective date. Ho-Chuck Inc. requested the Department to
consider a smaller increase, such as a 25 percent increase to the current $684
per week salary level ( i.e., $855 per week), with “staggered increases over a
period of 3 to 5 years to the higher amount.”

As discussed in this final rule,[496] the Department agrees with commenters such
as the Coalition of State AGs that the updating mechanism's triennial updates to
the earnings thresholds for exemption will provide greater certainty and
predictability for the regulated community. The Department appreciates that some
employers, such as state, local, and tribal governments, may have less
flexibility than others to account for new labor costs, as well as that
employers in low-wage industries, regions, and in non-metropolitan areas may be
more affected because they typically pay lower wages and salaries. However, the
Department believes that costs and transfers associated with this rule will be
manageable for and will not result in significant disruptions to state, local,
and tribal governments. The Department is setting the standard salary level
using earnings data from the lowest-wage Census Region, in part to accommodate
small employers and employers in low-wage sectors and regions. As discussed
earlier in this section, the Department estimates that total first-year costs
for state and local governments comprise 0.02 percent of state and local
government payrolls and 0.004 percent of state and local government revenues.
Moreover, as discussed in this final rule,[497] the Department has determined,
upon consideration of commenter feedback, that a delayed applicability date is
appropriate for the new standard salary level and the HCE total annual
compensation threshold. Specifically, the new $1,128 per week standard salary
level and $151,164 per year HCE total annual compensation threshold will not be
applicable until January 1, 2025.

D. LEAST BURDENSOME OPTION OR EXPLANATION REQUIRED

This final rule has described the Department's consideration of various options
throughout the preamble ( see section V.B.4.iv) and economic impact analysis (
see section VII.C.8). The Department believes that it has chosen the least
burdensome but still cost-effective methodology to update the salary level
consistent with the Department's statutory obligation to define and delimit the
scope of the EAP exemption. Although some alternative options considered would
set the standard salary level at a rate lower than the finalized level, that
outcome would not necessarily be the most cost-effective or least-burdensome. A
salary level equal to or below the long test level would result in the exemption
of lower-salaried employees who traditionally were entitled to overtime
protection under the long test either because of their low salary or because
they perform large amounts of nonexempt work. This approach would also
effectively place the burden of the move from a two-test system to a one-test
system on employees who historically were nonexempt because they earned between
the long and short test salary levels but did not meet the long duties test.

Selecting a standard salary level in a one-test system inevitably affects the
impact of providing overtime protection to employees paid between the long and
short test salary levels. Too low of a salary level shifts the impact of the
move to a one-test system to employees by exempting lower-salaried employees who
perform large amounts of nonexempt work. However, too high a salary level shifts
the impact of the move to a one-test system to employers by denying them the use
of the exemption for lower-salaried employees who traditionally were exempt
under the long duties test, thereby increasing their labor costs. The Department
has determined that setting the standard salary level equivalent to the earnings
of the 35th percentile of full-time salaried workers in the lowest-wage Census
Region will more effectively identify in a one-test system who is employed in a
bona fide EAP capacity in a manner that reasonably distributes among employees
earning between the long and short test salary levels and their employers the
impact of the Department's move from a two-test to a one-test system. The
Department believes that the final rule reduces burden on employers of nonexempt
workers who earn between the current and finalized standard salary level.
Currently, employers must rely on the duties test to determine the exemption
status of these workers. Under this final rule, the exemption status of these
workers will be determined based on the simpler salary level test.

The Department is also adopting a mechanism to regularly update the standard
salary level and HCE total compensation requirement for wage growth, which will
ensure that the thresholds continue to work efficiently to help identify EAP
employees. As Start Printed Page 32971 noted above, the history of the part 541
regulations shows multiple, significant gaps during which the earnings
thresholds were not updated and their effectiveness in helping to define the EAP
exemption decreased as wages increased. Routine updates of the earnings
thresholds to reflect wage growth will bring certainty and stability to
employers and employees alike.

X. EXECUTIVE ORDER 13132, FEDERALISM

The Department has reviewed this rule in accordance with Executive Order 13132
regarding federalism and determined that it does not have federalism
implications. The proposed rule would not have substantial direct effects on the
States, on the relationship between the National Government and the States, or
on the distribution of power and responsibilities among the various levels of
government.

XI. EXECUTIVE ORDER 13175, INDIAN TRIBAL GOVERNMENTS

This rule will not have tribal implications under Executive Order 13175 that
would require a tribal summary impact statement. The rule would not have
substantial direct effects on one or more Indian tribes, on the relationship
between the Federal Government and Indian tribes, or on the distribution of
power and responsibilities between the Federal Government and Indian tribes.

Start List of Subjects

LIST OF SUBJECTS IN 29 CFR PART 541

* Labor
* Minimum wages
* Overtime pay
* Salaries
* Teachers
* Wages

End List of Subjects

For the reasons set out in the preamble, the Wage and Hour Division, Department
of Labor amends Title 29 CFR chapter V, as follows:

Start Part

PART 541—DEFINING AND DELIMITING THE EXEMPTIONS FOR EXECUTIVE, ADMINISTRATIVE,
PROFESSIONAL, COMPUTER AND OUTSIDE SALES EMPLOYEES

End Part Start Amendment Part

1. The authority citation for part 541 continues to read as follows:

End Amendment Part Start Authority

Authority: 29 U.S.C. 213; Pub. L. 101-583, 104 Stat. 2871; Reorganization Plan
No. 6 of 1950 (3 CFR, 1945-53 Comp., p. 1004); Secretary's Order 01-2014 (Dec.
19, 2014), 79 FR 77527 (Dec. 24, 2014).

End Authority Start Amendment Part

2. Add § 541.5 to read as follows:

End Amendment Part
§ 541.5
Severability.

The provisions of this part are separate and severable and operate independently
from one another. If any provision of this part is held to be invalid or
unenforceable by its terms, or as applied to any person or circumstance, or
stayed pending further agency action, the provision must be construed so as to
continue to give the maximum effect to the provision permitted by law, unless
such holding be one of utter invalidity or unenforceability, in which event the
provision will be severable from part 541 and will not affect the remainder
thereof.

Start Amendment Part

3. Amend § 541.100, by revising paragraph (a)(1) to read as follows:

End Amendment Part
§ 541.100
General rule for executive employees.

(a) * * *

(1) Compensated on a salary basis at not less than the level set forth in
§ 541.600;

* * * * *
Start Amendment Part

4. Amend § 541.200, by revising paragraph (a)(1) to read as follows:

End Amendment Part
§ 541.200
General rule for administrative employees.

(a) * * *

(1) Compensated on a salary or fee basis at not less than the level set forth in
§ 541.600;

* * * * *
Start Amendment Part

5. Amend § 541.204, by revising paragraph (a)(1) to read as follows:

End Amendment Part
§ 541.204
Educational establishments.

(a) * * *

(1) Compensated on a salary or fee basis at not less than the level set forth in
§ 541.600; or on a salary basis which is at least equal to the entrance salary
for teachers in the educational establishment by which employed; and

* * * * *
Start Amendment Part

6. Amend § 541.300, by revising paragraph (a)(1) to read as follows:

End Amendment Part
§ 541.300
General rule for professional employees.

(a) * * *

(1) Compensated on a salary or fee basis at not less than the level set forth in
§ 541.600; and

* * * * *
Start Amendment Part

7. Amend § 541.400, by revising the first sentence of paragraph (b) to read as
follows:

End Amendment Part
§ 541.400
General rule for computer employees.
* * * * *

(b) The section 13(a)(1) exemption applies to any computer employee who is
compensated on a salary or fee basis at not less than the level set forth in
§ 541.600. * * *

* * * * *
Start Amendment Part

8. Revise § 541.600 to read as follows:

End Amendment Part
§ 541.600
Amount of salary required.

(a) Standard salary level. To qualify as an exempt executive, administrative, or
professional employee under section 13(a)(1) of the Act, an employee must be
compensated on a salary basis at a rate per week of not less than the amount set
forth in paragraphs (a)(1) through (3) of this section, exclusive of board,
lodging or other facilities, unless paragraph (b) or (c) of this section
applies. Administrative and professional employees may also be paid on a fee
basis, as defined in § 541.605.

(1) Beginning on July 1, 2024, $844 per week (the 20th percentile of weekly
earnings of full-time nonhourly workers in the lowest-wage Census Region and/or
retail industry nationally).

(2) Beginning on January 1, 2025, $1,128 per week (the 35th percentile of weekly
earnings of full-time nonhourly workers in the lowest-wage Census Region).

(3) As of July 1, 2027, the level calculated pursuant to § 541.607(b)(1).

(b) Commonwealth of the Northern Mariana Islands, Guam, Puerto Rico, U.S. Virgin
Islands. To qualify as an exempt executive, administrative, or professional
employee under section 13(a)(1) of the Act, an employee in the Commonwealth of
the Northern Mariana Islands, Guam, Puerto Rico, or the U.S. Virgin Islands
employed by employers other than the Federal Government must be compensated on a
salary basis at a rate of not less than $455 per week, exclusive of board,
lodging or other facilities. Administrative and professional employees may also
be paid on a fee basis, as defined in § 541.605.

(c) American Samoa. To qualify as an exempt executive, administrative, or
professional employee under section 13(a)(1) of the Act, an employee in American
Samoa employed by employers other than the Federal Government must be
compensated on a salary basis at a rate of not less than $380 per week,
exclusive of board, lodging or other facilities. Administrative and professional
employees may also be paid on a fee basis, as defined in § 541.605.

(d) Frequency of payment. The salary level requirement may be translated into
equivalent amounts for periods longer than one week. For example, the $1,128 per
week requirement described in paragraph (a)(2) of this section would be met if
the employee is compensated biweekly on a salary basis of not less than $2,256,
semimonthly on a salary basis of not less than $2,444, or monthly on a salary
basis of not less than $4,888. However, the shortest period of payment that will
meet this compensation requirement is one week.

(e) Alternative salary level for academic administrative employees. In Start
Printed Page 32972 the case of academic administrative employees, the salary
level requirement also may be met by compensation on a salary basis at a rate at
least equal to the entrance salary for teachers in the educational establishment
by which the employee is employed, as provided in § 541.204(a)(1).

(f) Hourly rate for computer employees. In the case of computer employees, the
compensation requirement also may be met by compensation on an hourly basis at a
rate not less than $27.63 an hour, as provided in § 541.400(b).

(g) Exceptions to the standard salary criteria. In the case of professional
employees, the compensation requirements in this section shall not apply to
employees engaged as teachers ( see § 541.303); employees who hold a valid
license or certificate permitting the practice of law or medicine or any of
their branches and are actually engaged in the practice thereof ( see
§ 541.304); or to employees who hold the requisite academic degree for the
general practice of medicine and are engaged in an internship or resident
program pursuant to the practice of the profession ( see § 541.304). In the case
of medical occupations, the exception from the salary or fee requirement does
not apply to pharmacists, nurses, therapists, technologists, sanitarians,
dietitians, social workers, psychologists, psychometrists, or other professions
which service the medical profession.

Start Amendment Part

9. Amend § 541.601 by revising paragraph (a), the first sentence of paragraph
(b)(1), and paragraph (b)(2) to read as follows:

End Amendment Part
§ 541.601
Highly compensated employees.

(a) An employee shall be exempt under section 13(a)(1) of the Act if the
employee receives total annual compensation of not less than the amount set
forth in paragraph (a)(1) through (4) of this section, and the employee
customarily and regularly performs any one or more of the exempt duties or
responsibilities of an executive, administrative, or professional employee
identified in subpart B, C, or D of this part:

(1) Beginning on July 1, 2024, $132,964 per year (the annualized earnings amount
of the 80th percentile of full-time nonhourly workers nationally).

(2) Beginning on January 1, 2025, $151,164 per year (the annualized earnings
amount of the 85th percentile of full-time nonhourly workers nationally).

(3) As of July 1, 2027, the total annual compensation level calculated pursuant
to § 541.607(b)(2).

(4) Where the annual period covers periods during which multiple total annual
compensation levels apply, the amount of total annual compensation due will be
determined on a proportional basis.

(b)(1) Total annual compensation must include at least a weekly amount equal to
that required by § 541.600(a)(1) through (3) paid on a salary or fee basis as
set forth in §§ 541.602 and 541.605, except that § 541.602(a)(3) shall not apply
to highly compensated employees. * * *

(2) If an employee's total annual compensation does not total at least the
amount set forth in paragraph (a) of this section by the last pay period of the
52-week period, the employer may, during the last pay period or within one month
after the end of the 52-week period, make one final payment sufficient to
achieve the required level. For example, for a 52-week period beginning January
1, 2025, an employee may earn $135,000 in base salary, and the employer may
anticipate based upon past sales that the employee also will earn $20,000 in
commissions. However, due to poor sales in the final quarter of the year, the
employee only earns $14,000 in commissions. In this situation, the employer may
within one month after the end of the year make a payment of at least $2,164 to
the employee. Any such final payment made after the end of the 52-week period
may count only toward the prior year's total annual compensation and not toward
the total annual compensation in the year it was paid. If the employer fails to
make such a payment, the employee does not qualify as a highly compensated
employee, but may still qualify as exempt under subpart B, C, or D of this part.

* * * * *
Start Amendment Part

10. Amend § 541.602 by revising the first sentence of paragraph (a)(3) and the
first sentence of paragraph (a)(3)(i) to read as follows:

End Amendment Part
§ 541.602
Salary basis.
* * * * *

(a)(3) Up to ten percent of the salary amount required by § 541.600(a) through
(c) may be satisfied by the payment of nondiscretionary bonuses, incentives, and
commissions, that are paid annually or more frequently. * * *

(i) If by the last pay period of the 52-week period the sum of the employee's
weekly salary plus nondiscretionary bonus, incentive, and commission payments
received is less than 52 times the weekly salary amount required by § 541.600(a)
through (c), the employer may make one final payment sufficient to achieve the
required level no later than the next pay period after the end of the year. * *
*

* * * * *
Start Amendment Part

11. Amend § 541.604 by

End Amendment Part Start Amendment Part

a. Revising the second, third, and fourth sentences of paragraph (a) and;

End Amendment Part Start Amendment Part

b. Revising the third sentence in paragraph (b).

End Amendment Part

The revisions and additions read as follows:

§ 541.604
Minimum guarantee plus extras.

(a) * * * Thus, for example under the salary requirement described in
§ 541.600(a)(2), an exempt employee guaranteed at least $1,128 each week paid on
a salary basis may also receive additional compensation of a one percent
commission on sales. An exempt employee also may receive a percentage of the
sales or profits of the employer if the employment arrangement also includes a
guarantee of at least $1,128 each week paid on a salary basis. Similarly, the
exemption is not lost if an exempt employee who is guaranteed at least $1,128
each week paid on a salary basis also receives additional compensation based on
hours worked for work beyond the normal workweek. * * *

(b) * * * Thus, for example under the salary requirement described in
§ 541.600(a)(2), an exempt employee guaranteed compensation of at least $1,210
for any week in which the employee performs any work, and who normally works
four or five shifts each week, may be paid $350 per shift without violating the
$1,128 per week salary basis requirement. * * *

Start Amendment Part

12. Amend § 541.605 by revising paragraph (b) to read as follows:

End Amendment Part
§ 541.605
Fee basis.
* * * * *

(b) To determine whether the fee payment meets the minimum amount of salary
required for exemption under these regulations, the amount paid to the employee
will be tested by determining the time worked on the job and whether the fee
payment is at a rate that would amount to at least the minimum salary per week,
as required by §§ 541.600(a) through (c) and 541.602(a), if the employee worked
40 hours. Thus, for example under the salary requirement described in
§ 541.600(a)(2), an artist paid $600 for a picture that took 20 hours to
complete meets the $1,128 minimum salary requirement for exemption since
earnings at this rate would yield the artist $1,200 if 40 hours were worked.

Start Amendment Part

13. Add § 541.607 to read as follows:

End Amendment Part
Start Printed Page 32973
§ 541.607
Regular updates to amounts of salary and compensation required.

(a) Initial update —(1) Standard salary level. Beginning on July 1, 2024, the
amount required to be paid per week to an exempt employee on a salary or fee
basis, as applicable, pursuant to § 541.600(a)(1) will be not less than $844.

(2) Highly compensated employees. Beginning on July 1, 2024, the amount required
to be paid in total annual compensation to an exempt highly compensated employee
pursuant to § 541.601(a)(1) will be not less than $132,964.

(b) Future updates —(1) Standard salary level. (i) As of July 1, 2027, and every
3 years thereafter, the amount required to be paid to an exempt employee on a
salary or fee basis, as applicable, pursuant to § 541.600(a) will be updated to
reflect current earnings data.

(ii) The Secretary will determine the future update amounts by applying the
methodology in effect under § 541.600(a) at the time the Secretary issues the
notice required by paragraph (b)(3) of this section to current earnings data.

(2) Highly compensated employees. (i) As of July 1, 2027, and every 3 years
thereafter, the amount required to be paid in total annual compensation to an
exempt highly compensated employee pursuant to § 541.601(a) will be updated to
reflect current earnings data.

(ii) The Secretary will determine the future update amounts by applying the
methodology used to determine the total annual compensation amount in effect
under § 541.601(a) at the time the Secretary issues the notice required by
paragraph (b)(3) of this section to current earnings data.

(3) Notice. (i) Not fewer than 150 days before each future update of the
earnings requirements under paragraphs (b)(1) and (2) of this section, the
Secretary will publish a notice in the Federal Register stating the updated
amounts based on the most recent available 4 quarters of CPS MORG data, or its
successor publication, as published by the Bureau of Labor Statistics.

(ii) No later than the effective date of the updated earnings requirements, the
Wage and Hour Division will publish on its website the updated amounts for
employees paid pursuant to this part.

(4) Delay of updates. A future update to the earnings thresholds under this
section is delayed from taking effect for a period of 120 days if the Secretary
has separately published a notice of proposed rulemaking in the Federal Register
, not fewer than 150 days before the date the update is set to take effect,
proposing changes to the earnings threshold(s) and/or updating mechanism due to
unforeseen economic or other conditions. The Secretary must state in the notice
issued pursuant to paragraph (b)(3)(i) of this section that the scheduled update
is delayed in accordance with this paragraph (b)(4). If the Secretary does not
issue a final rule affecting the scheduled update to the earnings thresholds by
the end of the 120-day extension period, the updated amounts published in
accordance with paragraph (b)(3) of this section will take effect upon the
expiration of the 120-day period. The 120-day delay of a scheduled update under
this paragraph will not change the effective dates for future updates of the
earnings requirements under this section.

Start Signature

Signed this 11th day of April, 2024.

Jessica Looman,

Administrator, Wage and Hour Division.

End Signature End Supplemental Information

FOOTNOTES

1. 29 U.S.C. 213(a)(1).

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2. See, e.g., Idaho Sheet Metal Works, Inc. v. Wirtz, 383 U.S. 190, 209
(1966); Walling v. Gen. Indus. Co., 330 U.S. 545, 547-48 (1947).

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3. In determining earnings percentiles in its part 541 rulemakings since 2004,
the Department has consistently looked at nonhourly earnings for full-time
workers from the Current Population Survey (CPS) Merged Outgoing Rotation Group
(MORG) data collected by the U.S. Bureau of Labor Statistics (BLS). As explained
in section VII.B.5.i, the Department considers data representing compensation
paid to nonhourly workers to be an appropriate proxy for compensation paid to
salaried workers, although for simplicity the Department uses the terms salaried
and nonhourly interchangeably in this rule. The Department relied on CPS MORG
data for calendar year 2022 to develop the NPRM, including to determine the
proposed salary level. The Department is using the most recent full-year data
available for this final rule, which is CPS MORG data for calendar year 2023.
The new standard salary level of $1,128 per week is $12 to $30 less than the
Department estimated in the NPRM. 88 FR 62152, 62152-53 n.3 (Sept. 8, 2023).

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4. 69 FR 22122 (April 23, 2004).

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5. 84 FR 51230 (Sept. 27, 2019).

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6. 81 FR 32391 (May 23, 2016).

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7. The Department never enforced the 2016 rule because it was invalidated by
the U.S. District Court for the Eastern District of Texas. See Nevada v. U.S.
Department of Labor, 275 F.Supp.3d 795 (E.D. Tex. 2017).

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8. See84 FR 51243-45; 81 FR 32414, 32444-45; 69 FR 22126-28.

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9. The Department proposed in sections IV.B.1 and B.2 of the NPRM to apply the
updated standard salary level to the four U.S. territories that are subject to
the federal minimum wage—Puerto Rico, Guam, the U.S. Virgin Islands, and the
Commonwealth of the Northern Mariana Islands (CNMI)—and to update the special
salary levels for American Samoa and the motion picture industry in relation to
the new standard salary level. The Department will address these aspects of its
proposal in a future final rule.

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10. See69 FR 22172-73.

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11. Id. at 22174.

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12. 84 FR 51250-51; 81 FR 32430; see also69 FR 22164.

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13. 69 FR 22171; 84 FR 51251-52.

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14. 81 FR 32430.

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15. See29 U.S.C. 206(a), 207(a).

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16. See Helix Energy Solutions Group, Inc. v. Hewitt, 143 S.Ct. 677, 682
(2023) (“Under [section 13(a)(1)], the Secretary sets out a standard for
determining when an employee is a ‘bona fide executive.’”).

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17. See Batterton v. Francis, 432 U.S. 416, 425 n.9 (1977).

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18. See Fair Labor Standards Act of 1938, Pub. L. 75-718, 13(a)(1), 52 Stat.
1060, 1067 (June 25, 1938).

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19. See National Industrial Recovery Act, Pub. L. 73-67, ch. 90, title II,
206(2), 48 Stat 195, 204-5 (June 16, 1933).

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20. See Report of the Minimum Wage Study Commission, Volume IV, pp. 236 and
240 (June 1981).

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21. See id.

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22. See29 U.S.C. 218(a).

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23. “Executive, Administrative, Professional . . . Outside Salesman” Redefined,
Wage and Hour Division, U.S. Department of Labor, Report and Recommendations of
the Presiding Officer [Harold Stein] at Hearings Preliminary to Redefinition
(Oct. 10, 1940) (Stein Report) at 19.

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24. Id.; see Report of the Minimum Wage Study Commission, Volume IV, p. 236
(“Higher base pay, greater fringe benefits, improved promotion potential and
greater job security have traditionally been considered as normal compensatory
benefits received by EAP employees, which set them apart from non-EAP
employees.”).

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25. See84 FR 51237; see also Report and Recommendations on Proposed Revisions
of Regulations, Part 541, by Harry Weiss, Presiding Officer, Wage and Hour and
Public Contracts Divisions, U.S. Department of Labor (June 30, 1949) (Weiss
Report) at 8.

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26. 84 FR 51235; see also Stein Report at 5, 19; Weiss Report at 9.

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27. 3 FR 2518 (Oct. 20, 1938).

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28. Id.

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29. 5 FR 4077 (Oct. 15, 1940).

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30. See Stein Report.

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31. 5 FR 4077.

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32. See Weiss Report.

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33. See14 FR 7705 (Dec. 24, 1949).

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34. Id. at 7706.

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35. See Report and Recommendations on Proposed Revision of Regulations, Part
541, Under the Fair Labor Standards Act, by Harry S. Kantor, Assistant
Administrator, Office of Regulations and Research, Wage and Hour and Public
Contracts Divisions, U.S. Department of Labor (Mar. 3, 1958) (Kantor Report) at
6-7. Under the two-test system, the ratio of the short test salary level to the
long test salary levels ranged from approximately 130 percent to 180 percent.
See81 FR 32403.

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36. 19 FR 4405 (July 17, 1954).

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37. 23 FR 8962 (Nov. 18, 1958).

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38. 26 FR 8635 (Sept. 15, 1961).

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39. 28 FR 9505 (Aug. 30, 1963).

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40. 32 FR 7823 (May 30, 1967).

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41. 35 FR 883 (Jan. 22, 1970).

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42. 38 FR 11390 (May 7, 1973).

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43. 40 FR 7091 (Feb. 19, 1975).

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44. The Department first created a limited exception from the salary basis test
for public employees. 57 FR 37677 (Aug. 19, 1992). The Department also
implemented a 1990 law requiring it to promulgate regulations permitting
employees in certain computer-related occupations to qualify as exempt under
section 13(a)(1) of the FLSA. 57 FR 46744 (Oct. 9, 1992); see Pub. L. 101-583,
sec. 2, 104 Stat. 2871 (Nov. 15, 1990).

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45. 40 FR 7091.

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46. See Pub. L. 101-157, sec. 2, 103 Stat. 938 (Nov. 17, 1989).

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47. SeePub. L. 104-188, sec. 2104(b), 110 Stat 1755 (Aug. 20, 1996).

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48. 69 FR 22122.

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49. See id. at 22192-93 (acknowledging “de minimis differences in the standard
duties tests compared to the . . . short duties tests”).

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50. See id. at 22126-28.

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51. Id. at 22167.

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52. Id. at 22126.

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53. Id. at 22171. The Department last set the long and short test salary
levels in 1975. Throughout this preamble, when the Department refers to the
relationship of salary levels set in this rule and the 2004, 2016, and 2019
rules to equivalent long or short test salary levels, it is referring to salary
levels based on contemporaneous (at the relevant point in time) data that, in
the case of the long test salary level, would exclude the lowest-paid 10 percent
of exempt EAP employees in low-wage industries and areas and, in the case of the
short test salary level, would be 149 percent of a contemporaneous long test
salary level. The short test salary ratio of 149 percent is the simple average
of the 15 historical ratios of the short test salary level to the long test
salary level. See81 FR 32467 & n.149.

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54. 69 FR 22172.

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55. See id. at 22169 (Table 3).

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56. Id. at 22172.

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57. Id. at 22171.

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58. 81 FR 32404-05.

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59. Id. at 32428.

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60. Id. at 32422.

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61. See id. at 32425-26.

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62. See id. at 32430.

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63. Id. at 32444.

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64. In the 2016 rule, the Department estimated the historical range of short
test salary levels as from $889 to $1,231 (based on contemporaneous earnings
data). Id. at 32405.

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65. See Nevada v. U.S. Department of Labor, 218 F. Supp. 3d 520 (E.D. Tex.
2016).

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66. See Nevada, 275 F.Supp.3d 795.

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67. See84 FR 10900 (March 22, 2019).

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68. See84 FR 51230.

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69. The Department established special salary levels of $455 per week for
Puerto Rico, Guam, the U.S. Virgin Islands, and the CNMI (effectively continuing
the 2004 salary level); it also maintained the 2004 rule's $380 per week special
salary level for employees in American Samoa. Id. at 51246.

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70. See id. at 51241-43.

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71. See id. at 51242.

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72. Id. at 51244.

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73. Id. at 51251.

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74. A lawsuit challenging the 2019 rule was filed in August 2022. The district
court upheld the rule and an appeal of that decision was pending at the time the
Department issued this final rule. See Mayfield v. U.S. Department of Labor,
2023 WL 6168251 (W.D. Tex. Sept. 20, 2023), appeal docketed, No. 23-50724 (5th
Cir. Oct. 11, 2023).

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75. See, e.g., Idaho Sheet Metal Works, 383 U.S. at 209; Walling, 330 U.S. at
547-48.

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76. For a description of the duties that are required to be performed under the
EAP exemption, see §§ 541.100 (executive employees); 541.200 (administrative
employees); 541.300, 541.303-.304 (teachers and professional employees); 541.400
(computer employees); 541.500 (outside sales employees).

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77. Alternatively, administrative and professional employees may be paid on a
fee basis for a single job regardless of the time required for its completion as
long as the hourly rate for work performed ( i.e., the fee payment divided by
the number of hours worked) would total at least the weekly amount specified in
the regulation if the employee worked 40 hours. See § 541.605.

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78. See §§ 541.303(d); 541.304(d); 541.500(c); 541.600(e). Such employees are
also not subject to a fee basis test.

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79. See § 541.600(c)-(d).

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80. See §§ 541.600(a); 541.601(a)(1).

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81. See §§ 541.100; 541.200; 541.300.

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82. See §§ 541.100; 541.200; 541.300.

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83. See § 541.709.

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84. § 541.602(a)(3).

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85. § 541.601.

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86. § 541.601(d).

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87. See § 541.601(b)(1); see also84 FR 51249.

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88. See88 FR 62152.

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89. The Department noted that the final rule would use the most recent earnings
data available to set the standard salary level, which would change the dollar
amount of the resulting threshold. See88 FR 62152-53 n. 3.

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90. In this final rule the Department is not finalizing its proposal in section
IV.B.1 and B.2 of the NPRM to apply the standard salary level to the U.S.
territories subject to the federal minimum wage and to update the special salary
levels for American Samoa and the motion picture industry. The Department will
address these aspects of its proposal in a future final rule. While the
Department is not finalizing its proposal, it is making nonsubstantive changes
in provisions addressing the territories as a result of other changes in this
final rule.

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91. In regulations.gov, the number of comments received is listed as 33,310 and
the number of posted comments is 26,280. This difference is because one
commenter, WorkMoney, attached thousands of comments to their one submission.

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92. As noted above, teachers are among the employees for whom there is no
salary level requirement under the part 541 regulations. See § 541.303(d).

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93. See69 FR 22168-69.

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94. Id. at 22214.

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95. See84 FR 51260 (Table 4) (showing that the salary level derived from the
Department's long test methodology would have been $724 per week rather than the
finalized $684 per week amount).

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96. 81 FR 32405.

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97. See84 FR 10908; 84 FR 51242.

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98. See Nevada, 275 F.Supp.3d. at 806.

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99. See section V.A.3.

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100. See, e.g.,84 FR 51250-51.

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101. Estimate based on the change in median usual weekly earnings of full-time
wage and salary workers from Q3 2019 to Q4 2023. BLS, Median usual weekly
earnings of full-time wage and salary workers by sex, quarterly averages,
seasonally adjusted. https://www.bls.gov/ news.release/ wkyeng.t01.htm.

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102. Commenter views on the adequacy of the current HCE threshold are addressed
in section V.C.

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103. See discussion in section V.A.

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104. See supra note 23.

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105. See sections V.B. and VII.C.8.

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106. 84 FR 51251-52.

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107. 84 FR 10914-15.

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108. The Department “is not authorized to set wages or salaries for executive,
administrative, and professional employees . . . [and] improving the conditions
of such employees is not the objective of the [part 541] regulations.” Weiss
Report at 11.

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109. See5 U.S.C. 801(a)(3)(A); 5 U.S.C. 553(d).

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110. The January 1, 2025 applicability date is six months after the effective
date of the rule.

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111. 88 FR 62180.

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112. Id. Commenters generally did not address the Department's suggestion that
a delay in the effective date for the proposed standard salary level increase be
combined with an initial update to the existing salary level to reflect wage
growth. An individual commenter acknowledged the Department's suggestion but
“defer[ed] to the economists and statisticians to comment as to whether, if the
effective date is later than 60 days, the Department should initially adjust the
salary level to reflect recent wage growth, and if so, the methodology for doing
so.” See also Ho-Chunk, Inc., a subsidiary of the Winnebago Tribe of Nebraska.

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113. Future updates will occur every three years on July 1.

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114. The Department is also revising §§ 541.100, 541.200, and 541.300 to
reflect that an executive, administrative, or professional employee must be
compensated on a salary or fee basis at not less than the level set forth in
§ 541.600 (rather than referencing a specific salary level amount). Similarly,
it is revising § 541.204 and § 541.400 to reflect that an employee employed in a
bona fide administrative capacity and a computer employee may qualify for the
section 13(a)(1) exemption if they are compensated on a salary or fee basis at
not less than the level set forth in § 541.600 (rather than referencing a
specific salary level amount). The Department is also updating cross-references
to § 541.600(a) in §§ 541.602 and 541.605 to reference § 541.600(a)-(c).
Finally, the Department is revising § 541.604, which explains the circumstances
under which an employer may provide an exempt employee with additional
compensation without violating the salary basis requirement, and § 541.605,
which sets forth the conditions under which an administrative or professional
employee may be compensated on a fee basis, with examples that reflect the new
standard salary level amount of $1,128 per week.

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115. 84 FR 51250-51; 81 FR 32430; 69 FR 22164. See also,88 FR 62176.

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116. See section II.B.1.

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117. Observing that the proposed special salary level for American Samoa and
the base rate for the motion picture industry are set in relation to the
standard salary level, the Department also proposed that those earnings
thresholds reset at the time the standard salary level was updated. The
Department is not finalizing its proposal to apply the standard salary level to
the U.S. territories subject to the federal minimum wage and to update the
special salary levels for American Samoa and the motion picture industry. See
supra note 9. Therefore, the updating mechanism finalized in this rule will not
apply to the special salary levels at this time.

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118. 88 FR 62180

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119. Id.

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120. Id.

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121. See Stein Report at 5, 19. As discussed in section V.B.4.i, the vast
majority of employer commenters in this rulemaking, whether favoring no increase
or a smaller increase, presumed the salary level test's continued existence and
utility, with some, such as the National Restaurant Association, expressly
referencing their support for the 2019 rule's salary level increase. Many
commenters acknowledged the salary level's longstanding function of screening
obviously nonexempt employees from the exemption. See section V.B.4.ii. Other
commenters that opposed the proposal nonetheless cited benefits of having a
salary level test, including helping to ensure that the EAP exemption is not
abused, see, e.g., AASA/AESA/ASBO, Bellevue University, and “sav[ing]
investigators and employers time by giving them a quick, short-hand test[.]” See
National Restaurant Association.

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122. See, e.g., Wirtz v. Miss. Publishers Corp., 364 F.2d 603, 608 (5th Cir.
1966); Fanelli v. U.S. Gypsum Co., 141 F.2d 216, 218 (2d Cir. 1944); Walling v.
Yeakley, 140 F.2d 830, 832-33 (10th Cir. 1944).

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123. 2023 WL 6168251 (W.D. Tex. Sept. 20, 2023), appeal docketed, No. 23-50724
(5th Cir. Oct. 11, 2023).

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124. Walling, 140 F.2d at 831-32; see Ellis v. J.R.'s Country Stores, Inc.,
779 F.3d 1184, 1199 (10th Cir. 2015) (approvingly quoting Walling); see also
Auer v. Robins, 519 U.S. 452, 456 (1997) (“The FLSA grants the Secretary broad
authority to `defin[e] and delimi[t]' the scope of the exemption for executive,
administrative, and professional employees.”).

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125. Stein Report at 2.

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126. Weiss Report at 8.

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127. The standard salary level and HCE total annual compensation threshold in
the 2019 rule were set using pooled data for July 2016 to June 2019, adjusted to
reflect 2018/2019. 84 FR 51250.

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128. See section VII.

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129. Consistent with the 2019 rule, the Department used pooled data for the
most recent 3 years (2021, 2022, 2023), adjusting them to reflect 2023, for the
initial updates to both the standard salary level and HCE total annual
compensation threshold. See84 FR 51250.

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130. Although the Department's approach is not a phase-in, the effect of
increasing the salary level twice in 8 months is, from a timing perspective, not
altogether different from the request from some commenters to phase in the
salary level in more than one step. See, e.g., Argentum & ASHA; Associated
General Contractors; SBA Advocacy.

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131. See section V.B.

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132. See section V.C.

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133. The NPRM included updating the 2019 rule standard salary level and HCE
annual compensation threshold using 2022 data as a regulatory alternative,
stating that applying the methodologies would result in a standard salary level
of $822 per week and a HCE annual compensation threshold of $125,268. See88 FR
62218.

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134. In contrast, the Administrative Law Professors highlighted that
“[a]utomatic updating is a common feature of regulations pegged to monetary
values, even when the relevant authorizing statutes make no specific reference
to indexing or automatic adjustment.” Some of the examples cited by the
Administrative Law Professors to illustrate this point include: 79 FR 63317
(2014) (establishing automatic inflationary adjustments to the minimum amount
set by the regulation to define “adverse credit history”); 76 FR 23110 (2011)
(establishing automatic adjustments to the amount of “Denied Boarding
Compensation” airlines must pay affected passengers); 88 FR 35150 (2023)
(adopting once-every-five year inflation adjustments to the revenue threshold
for defining a “small business”); and Amusement & Music Operators Ass'n v.
Copyright Royalty Tribunal, 676 F.2d 1144 (7th Cir. 1982), cert. denied, 103 S.
Ct. 210 (1982) (upholding a rule promulgated by the Copyright Royalty Tribunal
establishing a $50 compulsory royalty fee to be paid by jukebox operators, and
which would be subject to future inflationary adjustments).

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135. Some commenters, such as Independent Electrical Contractors, RILA, and
U-Haul, further asserted that automatic updates improperly bypass the
requirements of the Regulatory Flexibility Act (“RFA”) and executive orders
requiring the Department to undertake a detailed economic and cost analysis. The
Department disagrees. Pursuant to the RFA, the Department has included in this
final rule as well as in the NPRM detailed estimates for the future costs of
updates under the updating mechanism. See section VII and VIII; 88 FR 62224.
Similarly, as relevant here, Executive Order 13563 directs agencies to take
certain steps when promulgating regulations, including using the “best available
techniques to quantify anticipated present and future benefits and costs as
accurately as possible” and adopting regulations “through a process that
involves public participation.” 76 FR 3821 (Jan. 18, 2011). The current
rulemaking fully satisfies all aspects of Executive Order 13563. See section
VII; 88 FR 62182. The RFA and Executive Order 13563 do not require notice and
comment rulemaking to precede future triennial updates made through the updating
mechanism established in this rulemaking.

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136. 69 FR 22171.

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137. See81 FR 32432-33 (noting that “instituting an automatic updating
mechanism . . . is an appropriate modernization and within the Department's
authority.”).

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138. 84 FR 51252.

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139. See https://www.bls.gov/ cps/ research/ nonhourly/
earnings-nonhourly-workers.htm.

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140. 81 FR 32441.

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141. See id. at 32441, 32507-08.

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142. The Edgeworth Economic study that was quoted by PPWO and a few other
commenters seemed to assume, without any support, that all affected workers or
newly nonexempt workers who earn between $684 and $1,059 per week will be
reclassified as hourly employees.

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143. See81 FR 32438-41.

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144. See id. at 32440.

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145. See section V.B.

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146. See section V.C.

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147. 3 FR 2518.

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148. See Stein Report at 20-21, 31-32.

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149. Weiss Report at 8, 14.

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150. Id. at 22-23.

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151. Kantor Report at 2-3.

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152. Id. at 6, 9.

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153. Id. at 6-7.

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154. Id. at 2-3; see Weiss Report at 8.

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155. 28 FR 7002 (July 9, 1963).

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156. Id. at 7004.

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157. Id.

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158. See34 FR 9934, 9935 (June 24, 1969).

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159. 35 FR 885.

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160. 40 FR 7091.

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161. Id. at 7091-92.

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162. See69 FR 22168. The 2004 rule looked to the 20th percentile of a data set
of all full-time salaried workers and the long test methodology looked to the
lowest paid 10 percent of exempt salaried workers. The two methodologies
resulted in equivalent salary levels because exempt salaried workers generally
have higher earnings than nonexempt salaried workers.

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163. 81 FR 32405.

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164. See84 FR 51260 (Table 4).

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165. Id. at 51238.

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166. See id. at 51237 (quoting Kantor Report at 2-3).

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167. See Kantor Report at 2-3; Weiss Report at 8 (“In an overwhelming majority
of cases, it has been found by careful inspection that personnel who did not
meet the salary requirements would also not qualify under other sections of the
regulations[.]”).

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168. See84 FR 51236.

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169. Weiss Report at 22-23.

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170. Id.

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171. 69 FR 22214.

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172. See id. at 22168-69.

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173. See id.

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174. See69 FR 22126-27.

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175. 81 FR 32405, 32467.

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176. 84 FR 10908.

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177. Id. (quoting Kantor Report at 5).

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178. 84 FR 51260.

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179. Id. at 51244.

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180. Id. at 51243.

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181. Numerous employer organizations supported the Department's decision in
2004 to move to a one-test system. See69 FR 22126-27. Commenters likewise
opposed returning to the two-test structure in the 2016 and 2019 rulemakings.
See84 FR 10905; 81 FR 32444.

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182. See5 FR 4077.

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183. 84 FR 51239 (internal quotation marks omitted).

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184. Stein Report at 19, 24; see also81 FR 32422.

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185. Stein Report at 19; see also id. at 26 (“[A] salary criterion constitutes
the best and most easily applied test of the employer's good faith in claiming
that the person whose exemption is desired is actually of such importance to the
firm that he is properly describable as an employee employed in a bona fide
administrative capacity.”).

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186. See Report of the Minimum Wage Study Commission, Vol. IV, at 236, 240;
see also, e.g., Stein Report at 19 (explaining that the “term `executive'
implies a certain prestige, status, and importance” denoted by pay
“substantially higher than” the federal minimum wage).

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187. Consistent with its longstanding practice, the Department declines
requests from commenters, including Defiance College, International Bancshares
Corporation, Rachel Greszler, and WFCA, that suggested the Department adopt
multiple salary level tests for different regions, industries, and/or small
businesses, rather than a single salary level that applies to all entities
nationwide. See84 FR 51239; 81 FR 32411; 69 FR 22171.

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188. 88 FR 62165 (citing 84 FR 51241).

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189. Weiss Report at 8.

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190. Kantor Report at 2-3.

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191. 69 FR 22165-22166.

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192. See id. at 22167-71 (showing that for all full-time salaried employees,
$455 in weekly earnings corresponded to just over the 20th percentile in the
South and the 20th percentile in retail, and that for employees performing EAP
duties, $455 in weekly earnings corresponded to just over the 8th percentile in
the South and the 10th percentile in retail). AFPI commented that in the 2003
NPRM the Department “acknowledged that `equivalency to either the current long
or short test salary levels is not appropriate' because of the switch to a
one-test system.” (quoting 68 FR 15560, 11570 (Mar. 31, 2003)). However, the
Department shifted in its final rule and validated its chosen methodology using
the long test salary level.

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193. See69 FR 22164.

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194. 84 FR 51237.

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195. Id. at 51231 (quoting 84 FR 10901).

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196. Id. at 51241 (quoting 275 F. Supp.3d at 806).

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197. Id. at 51244.

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198. During this period the Department used a one-test system that paired a
lower salary level with a more rigorous duties test. See, e.g.,5 FR 4077.

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199. The district court was principally concerned with the 2016 rule exceeding
the salary level's screening function and making too many employees nonexempt
based on salary alone. See Nevada 275 F.Supp.3d at 806 & n.6.

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200. Quoting 88 FR at 62158.

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201. NRF included an Oxford Economics report that questioned the Department's
long test figure ($925 per week), and, observing that the long test methodology
varied over time, stated that a “more reasonable” approach for replicating the
long test would be to adjust the 1975 long test level for inflation (which it
concluded would result in a salary level of $843 per week in 2022 dollars).

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202. See Stein Report at 6 (“In some instances the rate selected will
inevitably deny exemption to a few employees who might not unreasonably be
exempted, but, conversely, in other instances it will undoubtedly permit the
exemption of some persons who should properly be entitled to benefits of the
act.”).

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203. 88 FR 62164-65. Although some commenters addressed changes to the duties
test, see, e.g., AFL-CIO, AHLA, NELA, FMI, such changes are beyond the scope of
the current rulemaking.

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204. 69 FR 22166.

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205. See id. at 22166-70; see also section V.B.3.

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206. See, e.g.,84 FR 51245; 69 FR 22167.

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207. See69 FR 22126.

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208. See id. at 22126-27.

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209. The Chamber asserted that the Department's decision to adjust the salary
level to account for the shift to a one-test system “fails to appreciate the
continued importance of the `primary duty' principles, the application of which
includes an analysis of non-exempt work performed and its relation to the
employee's exempt work.” Although the Chamber is correct that the standard
duties test accounts for nonexempt work, it does so in a less rigorous manner
than the long duties test, resulting in some lower-paid white-collar employees
who pass the standard duties test but (due to their nonexempt work) would have
failed the long duties test.

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210. Several commenters criticized the Department for providing projected
salary level figures in footnote 3. See, e.g., PPWO; NRF. NAM stated that
footnote 3 was “inconsistent” with the Administrative Procedure Act.

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211. Stein Report at 2.

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212. AFPI mistakenly asserts that the increase from the 20th percentile to the
35th percentile “is based entirely on the switch to a one-test system in 2004.”
The majority of the salary level increase (from $684 to $942) is to update the
salary level for wage growth and fully restore the salary level's historic
screening function, with less than half (the increase from the $942 to $1,128)
made to account for the shift from the two-test system.

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213. See Walling, 140 F.2d at 831-32.

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214. Id. at 832.

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215. 81 FR 32410.

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216. See84 FR 51244.

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217. See id. at 51238; 81 FR 32404.

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218. Consistent with recent rulemakings and the NPRM, see88 FR 62188, 84 FR
51258, in determining earnings percentiles the Department looked at nonhourly
earnings for full-time workers from the CPS MORG data collected by BLS.

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219. As discussed in the economic analysis, see section VII, this modeling is
done using the Department's probability codes. See84 FR 51244; 69 FR 22167.

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220. See84 FR 51245; 81 FR 32405; 69 FR 22168.

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221. BLS currently publishes this data at https://www.bls.gov/ cps/ research/
nonhourly/ earnings-nonhourly-workers.htm.

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222. As discussed in section IV, in part to provide employers more time to
adjust, the new methodology will not be applicable until January 1, 2025.

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223. See81 FR 32408.

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224. 69 FR 22167.

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225. The Department has repeatedly recognized that increasing salary level
tends to correlate with the performance of bona fide EAP duties. See section
V.B.1 (discussing role of long test and short test salary levels); section V.C
(discussing the role of the HCE total annual compensation threshold). Thus,
increasing overtime protection specifically for workers earning at the lower end
of the range between the long test salary level and short test salary level—but
not those earning at the higher end of that range—is an especially appropriate
approach to balancing these concerns.

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226. See81 FR 32393.

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227. See Table 25.

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228. See84 FR 51242.

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229. See81 FR 32398, 32421; see also84 FR 51234.

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230. See81 FR 32390 (May 23, 2016).

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231. 84 FR 51239; 81 FR 32422; 69 FR 22171.

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232. See FLSA2008-1NA (Feb. 14, 2008).

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233. See88 FR 62169.

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234. Some commenters asserted that the proposed salary level would make
nonexempt too many workers in lower-wage regions and industries. See, e.g.,
AHLA; CUPA-HR; NAHB; National Restaurant Association. As discussed above, the
Department has accounted for low-wage industries and regions by using earnings
data from the lowest-wage Census Region to set the salary level.

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235. AFPI objected to the Department's use of nonhourly workers' earnings to
estimate the impact of the proposed salary level on salaried workers. See also
Chamber; National Association of Convenience Stores. The Department disagrees
with the suggestion that data on compensation paid to full-time nonhourly
workers is not representative of the earnings of full-time salaried workers. The
Department used the same approach in the 2004, 2016, and 2019 rules. See84 FR
51258; 81 FR 32414; 69 FR 22197. As explained in greater detail below, see
section VII, while the CPS MORG data on full-time nonhourly workers on which the
Department has relied includes workers paid on a salary basis along with workers
paid on other bases, such as on a piece-rate or day-rate basis, the Department's
analysis of data from the Panel Study of Income Dynamics (PSID) shows that
relatively few nonhourly workers were paid by methods other than salaried.

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236. NRF included a report from Oxford Economics which stated that a more
reasonable methodology for modeling the long test salary level would be to
update the 1975 long test level for inflation. As discussed in section V.B, the
Department disagrees with Oxford Economics' suggestion, which would conflict
with the Department's historical practice of avoiding the use of inflation
indicators in updating the salary level.

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237. As discussed further below, the Department does not believe, as some
commenters representing workers suggested, that the proportion of full-time
salaried workers who earned below the short test salary level in 1975 is the
most appropriate comparator for the population of workers who earn below the new
salary level.

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238. Excluded from this number are workers in named occupations and those
exempt under another non-EAP overtime exemption. The exemption status of these
groups will not be impacted by a change in the standard salary level. Commenters
did not address the Department's exclusion of these workers from its analysis of
the impact of the proposed salary level.

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239. This estimate is conservative, as it excludes 8.1 million white-collar
workers employed as teachers, attorneys, and physicians, for whom there is no
salary level requirement under the part 541 regulations and whose exemption
status is therefore always determined by their duties. If these workers in
“named occupations” are included, the percentage of salaried full-time
white-collar employees for whom exemption status would depend on duties, rather
than salary, increases to 76 percent. See §§ 541.303-304.

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240. The Department calculated the value of the long test salary level using
the same methodology it used in the NPRM, updated for current earnings data: the
10th percentile of earnings of likely exempt workers in low-wage industries and
regions. As explained in section V.B, any minor historical variations in the
long test methodology do not deprive it of its usefulness in helping determine
an appropriate salary level now.

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241. 88 FR 62171;84 FR 51239, 51237.

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242. See section VII.

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243. While a significant majority of full-time salaried white-collar workers
who earn above the new salary level meet the duties test, helping confirm its
appropriateness as an indicator of the capacity in which individuals are
employed, a large number of full-time salaried white-collar workers who earn
above the salary level—7.4 million—do not meet the duties test. A comparable
number of salaried white-collar workers who earned above the proposed salary
level did not meet the duties test, as EPI and AFI-CIO noted in their comments.
PPWO's statement that “[t]he Department seem[ed] to be setting the salary level
at a point at which all employees above the line would be exempt” is thus
incorrect. The Department agrees with EPI that the fact that a large number of
salaried white-collar workers who earn above the salary level will be nonexempt
because they do not meet the duties test underscores the importance of an
examination of duties under this rule. These 7.4 million workers will continue
to be entitled to overtime because of their duties, not their salaries. Notably,
this population is significantly larger than the population of workers who will
become nonexempt under the new salary level. Rather than indicating that the
salary level must be set higher, as AFL-CIO suggested, this fact indicates that
this rule meets the Department's objective of preserving a primary role for an
examination of duties.

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244. As noted above, see supra note 239, these figures exclude salaried
white-collar workers who are not subject to the part 541 salary criteria.

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245. Note that these numbers refer only to salaried white-collar workers at all
salary levels who meet the standard duties test, including workers who are
nonexempt because they earn below the current standard salary level.

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246. See84 FR 51258-59; 81 FR 32458; 69 FR 22198.

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247. See69 FR 22214.

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248. See section VII.

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249. The O*NET database contains hundreds of standardized and
occupation-specific descriptors. See https://www.onetcenter.org.

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250. See81 FR 32459.

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251. As discussed further below, about 2.1 million of the approximately 4.3
million salaried white-collar workers who earn between the long test salary
threshold and the Department's new salary level (about 48 percent of these
workers) do not meet the standard duties test. Thus, in effect, only 21 percent
of salaried white-collar workers who earn between the long and short test salary
levels—2.2 million out of a total of 10.8 million—have their exemption status
determined solely by the new standard salary level.

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252. Note that the 29.3 million worker figure only refers to workers who meet
the standard EAP exemption and thus differs from the population of potentially
affected EAP workers identified in the economic analysis (29.7 million), which
includes workers who qualify only for the HCE exemption. As noted above, this is
a conservative estimate because there are also 8.1 million workers in the “named
occupations” who, under the Department's regulations, are exempt based on their
duties alone.

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253. The 4.0 million workers affected by the new salary level represent only
13.8 percent of the 29.3 million salaried white-collar workers who currently
qualify for the standard EAP exemption.

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254. See88 FR 62173; 84 FR 51238.

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255. See84 FR 51258-59; 81 FR 32458; 69 FR 22198.

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256. 84 FR 51249; see also § 541.601(c) (“A high level of compensation is a
strong indicator of an employee's exempt status, thus eliminating the need for a
detailed analysis of the employee's job duties.”).

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257. See69 FR 22173-74.

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258. § 541.601(a)(1).

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259. § 541.601(b)(1). Although § 541.602(a)(3) allows employers to use
nondiscretionary bonuses, incentives, and commissions to satisfy up to 10
percent of the weekly standard salary level when applying the standard salary
and duties tests, the Department's regulation at § 541.601(b)(1) does not
permit employers to use such payments to satisfy the weekly standard salary
level requirement for HCE workers. See84 FR 51249.

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260. § 541.601(c).

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261. § 541.601(d).

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262. § 541.601(b)(1). The criteria for determining if an employee is paid on a
“salary basis” are identical under the standard exemption criteria and the HCE
test. See Helix Energy Solutions, 143 S.Ct. at 683.

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263. 69 FR 22174.

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264. See88 FR 62159.

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265. Id.

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266. It is the Department's intent that the increase in the HCE total annual
compensation threshold is independent of, and severable from, the increase in
the standard salary level to the 35th percentile of weekly earnings of full-time
salaried employees in the lowest-wage Census Region (the South) and the updating
provision, pursuant to which the HCE total annual compensation threshold will be
regularly updated to reflect current earnings.

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267. See84 FR 51250.

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268. See69 FR 22169-70 (Tables 3 and 4); 81 FR 32429.

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269. 88 FR 62176.

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270. As discussed in section IV, the increase in the HCE threshold and the
standard salary level using the new methodologies will be applicable on January
1, 2025.

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271. 69 FR 22174.

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272. Id.

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273. 84 FR 51250 (internal citation omitted).

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274. See § 541.601(c) (“A high level of compensation is a strong indicator of
an employee's exempt status, thus eliminating the need for a detailed analysis
of the employee's job duties.”); see also84 FR 51249.

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275. 69 FR 22174.

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276. See id. (explaining the need to avoid the unintended exemption of
employees “such as secretaries in New York City or Los Angeles . . . who clearly
are outside the scope of the exemptions and are entitled to the FLSA's minimum
wage and overtime pay protections.”).

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277. See84 FR 51249.

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278. See88 FR 62176 ; see also84 FR 51250.

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279. The Department also stated that it was the Department's intent that its
proposal to apply the standard salary level to the U.S territories subject to
the Federal minimum wage remain in effect even if the proposed change to the
standard salary level were invalidated. As discussed above, see supra note 9, at
this time the Department is not finalizing in this final rule its proposal to
apply the standard salary level to the U.S. territories subject to the Federal
minimum wage and to update the special salary levels for American Samoa and the
motion picture producing industry.

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280. See K-Mart Corp. v. Cartier, 486 U.S. 281, 294 (1988); Davis Cnty. Solid
Waste Mgmt. v. EPA, 108 F.3d 1454, 1459-60 (D.C. Cir. 1997).

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281. See Admin. Conf. of the U.S., Recommendation 2018-2, Severability in
Agency Rulemaking,83 FR 30683, 30685 (June 29, 2018).

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282. See81 FR 32251.

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283. As noted in section IV, the initial update to the standard salary level
and HCE total annual compensation requirement are applicable July 1, 2024,
whereas the new standard salary level and HCE total annual compensation
requirement are applicable 6 months later on January 1, 2025.

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284. Under these circumstances, the HCE total annual compensation requirement
would be $132,964 per year or, if the initial update to the earnings thresholds
under this rule did not go into effect, the current HCE total annual
compensation requirement of $107,432 per year.

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285. Under these circumstances, the standard salary level would be $844 per
week or, if the initial update to the earnings thresholds under this rule did
not go into effect, the current standard salary level of $684 per week.

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286. See section V.A.2.

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287. See5 CFR 1320.8(b)(3)(vi).

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288. See88 FR 62181.

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289. 29 U.S.C. 213(a)(1).

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290. The Department uses the terms salaried and nonhourly interchangeably in
this rule because, consistent with its 2004, 2016, and 2019 rules, the
Department considered data representing compensation paid to nonhourly workers
to be an appropriate proxy for compensation paid to salaried workers. The
Department also notes that the terms employee and worker are used
interchangeably throughout this analysis.

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291. BLS publishes quarterly and annual estimates of percentile earnings values
beginning with 2022 data at https://www.bls.gov/ cps/ research/ nonhourly/
earnings-nonhourly-workers.htm.

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292. Stein Report at 19, 24; see also81 FR 32422.

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293. See84 FR 51237.

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294. See84 FR 51238.

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295. See69 FR 22169 (Table 3).

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296. The Department will address these aspects of its proposal in a future
final rule. While the Department is not finalizing its proposal, it is making
nonsubstantive changes in provisions addressing the territories as a result of
other changes in this final rule.

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297. The term “affected workers” refers to the population of potentially
affected EAP workers who either pass the standard duties test and earn at least
$684 but less than the new salary level of $1,128 per week or pass only the HCE
duties test and earn at least $107,432 but less than the new HCE compensation
level of $151,164 per year.

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298. Here and elsewhere in this analysis, numbers are reported at varying
levels of aggregation, and are generally rounded to a single decimal point.
However, calculations are performed using exact numbers. Therefore, some numbers
may not match the reported totals or the calculations shown due to rounding of
components.

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299. In later years, earnings growth will cause some initially affected workers
to no longer be affected because their earnings will exceed the new salary or
compensation threshold. This occurs both in update years ( i.e., triennially)
and non-update years but will occur to a much greater degree in non-update
years. Additionally, some workers will become newly affected because their
earnings will reach at least $684 per week, and in the absence of this rule they
would lose their overtime protections. To estimate the total number of affected
workers over time, the Department accounts for both of these effects.

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300. Hereafter, unless otherwise specified, annualized values will be presented
using the 7 percent real discount rate.

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301. See69 FR 22196-209; 81 FR 32453-60; 84 FR 51255-60. Where the proposal
follows the methodology used to determine affected workers in the 2004, 2016,
and 2019 final rules, citations to these rules are not always included.

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302. In 2015, RAND released results from a survey conducted to estimate EAP
exempt workers. However, this survey does not have the variables or sample size
necessary for the Department to base its regulatory impact analysis (RIA) on
this analysis. Rohwedder, S. and Wenger, J.B. (2015). The Fair Labor Standards
Act: Worker Misclassification and the Hours and Earnings Effects of Expanded
Coverage. RAND Labor and Population.

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303. This is the outgoing rotation group (ORG); however, this analysis uses the
data merged over 12 months and thus it is referred to as MORG.

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304. Previous rulemakings also adjusted salaries in the pooled data using the
CPI-U, but the Department recognizes that the relationship between wage growth
and inflation between 2021 and 2023 may not be consistent. During the pandemic,
large employment losses in low-wage industries resulted in stronger wage growth
at the aggregate level. In part of the 2021-2023 period, high inflation outpaced
overall wage growth. Given these mixed effects, the Department decided to
continue its prior practice of adjusting these observations using CPI-U.

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305. The Department also reweighted for workers reporting zero earnings. In
addition, the Department eliminated, without reweighting, workers who reported
both usually working zero hours and working zero hours in the past week.

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306. This is justifiable because demographic and employment characteristics are
similar across these two populations ( e.g., age, gender, education,
distribution across industries, share paid nonhourly). The share of all workers
who stated that their hours vary (but provided no additional information) is 4.4
percent. To the extent these excluded workers are exempt, if they tend to work
more overtime than other workers, then transfer payments and costs may be
underestimated. Conversely, if they work fewer overtime hours, then transfer
payments and costs may be overestimated.

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307. See29 U.S.C. 204(f). Federal workers are identified in the CPS MORG with
the class of worker variable PEIO1COW.

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308. See id.

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309. Postal Service employees were identified with the Census industry
classification for postal service (6370). Tennessee Valley Authority employees
were identified as Federal workers employed in the electric power generation,
transmission, and distribution industry (570) and in Kentucky, Tennessee,
Mississippi, Alabama, Georgia, North Carolina, or Virginia. Library of Congress
employees were identified as Federal workers under Census industry `libraries
and archives' (6770) and residing in Washington DC.

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310. “The section 13(a)(1) exemptions and the regulations in [Part 541] do not
apply to manual laborers or other `blue collar' workers who perform work
involving repetitive operations with their hands, physical skill and energy.”
§ 541.3(a).

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311. GAO/HEHS. (1999). Fair Labor Standards Act: White Collar Exemptions in the
Modern Work Place. GAO/HEHS-99-164, 40-41, https://www.gao.gov/ assets/ 230/
228036.pdf.

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312. See69 FR 22240-44.

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313. CPS MORG variable PEERNHRY.

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314. 69 FR 22197.

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315. 84 FR 51257; 81 FR 32456, n.114.

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316. 84 FR 51257; 81 FR 32456-57; 69 FR 22197.

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317. Some computer employees may be exempt even if they are not paid on a
salary basis. Hourly computer employees who earn at least $27.63 per hour and
perform certain duties are exempt under section 13(a)(17) of the FLSA. These
workers are considered part of the EAP exemptions but were excluded from the
analysis because they are paid hourly and will not be affected by this rule
(these workers were similarly excluded in the 2004, 2016, and 2019 analyses).
Salaried computer workers are exempt if they meet the salary and duties tests
applicable to the EAP exemptions and are included in the analysis since they
will be impacted by this rule. Additionally, administrative and professional
employees may be paid on a fee basis, as opposed to a salary basis.
§ 541.605(a). Although the CPS MORG does not identify workers paid on a fee
basis, they are considered nonhourly workers in the CPS and consequently are
correctly classified as “salaried” (as was done in previous rules).

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318. The CPS variable PEERNHRY identifies workers as either hourly or
nonhourly.

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319. See69 FR 22197; 81 FR 32414; 84 FR 51258.

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320. University of Michigan, Institute for Social Research. 2019 PSID. Data
available at: https://simba.isr.umich.edu/ data/ data.aspx.

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321. The CPS MORG variable PRERNWA, which measures weekly earnings, is used to
identify weekly salary.

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322. In some instances, this may include too much nondiscretionary bonuses and
commissions ( i.e., when it is more than 10 percent of usual earnings). But in
other instances, it may not include enough nondiscretionary bonuses and
commissions ( i.e., when the respondent does not count them as usual earnings).

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323. Beginning in the April 2023 data, the CPS data are topcoded independently
each month and represent the average earnings of the top 3 percent of earnings
reported. See https://www.census.gov/ content/ dam/ Census/ programs-surveys/
cps/ updated-2022-cps-puf-changes.pdf for additional details.

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324. The Department used the standard Pareto distribution approach to impute
earnings above the topcoded value as described in Armour, P. and Burkhauser, R
(2013). Using the Pareto Distribution to Improve Estimates of Topcoded Earnings.
Center for Economic Studies (CES).

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325. Fair Labor Standards Act: White Collar Exemptions in the Modern Work
Place, supra note 311, at 40-41.

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326. WHD excluded nine that were not relevant to the analysis for various
reasons. For example, one code was assigned to unemployed persons whose last job
was in the Armed Forces, some codes were assigned to workers who are not FLSA
covered, others had no observations.

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327. The HCE duties test is used in conjunction with the HCE total annual
compensation requirement to determine eligibility for the HCE exemption. It is
much less stringent than the standard and short duties tests to reflect that
very highly paid employees are much more likely to be properly classified as
exempt.

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328. Census occupation codes were also updated in 2002 and 2010. References to
occupational codes in this analysis refer to the 2002 Census occupational codes.
Crosswalks and methodology available at: https://www.census.gov/ topics/
employment/ industry-occupation/ guidance/ code-lists.html.

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329. For the standard exemption, the relationship between earnings and
exemption status is not linear and is better represented with a gamma
distribution. For the HCE exemption, the relationship between earnings and
exemption can be well represented with a linear function because the
relationship is linear at high salary levels (as determined by the Department in
the 2004 rule). Therefore, the gamma model and the linear model would produce
similar results for highly compensated workers. See69 FR 22204-08, 22215-16.

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330. The gamma distribution was chosen because, during the 2004 revision, this
non-linear distribution best fit the data compared to the other non-linear
distributions considered ( i.e., normal and lognormal). A gamma distribution is
a general type of statistical distribution that is based on two parameters that
control the scale (alpha) and shape (in this context, called the rate parameter,
beta).

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331. A binominal distribution is frequently used for a dichotomous variable
where there are two possible outcomes; for example, whether one owns a home
(outcome of 1) or does not own a home (outcome of 0). Taking a random draw from
a binomial distribution results in either a zero or a one based on a probability
of “success” (outcome of 1). This methodology assigns exempt status to the
appropriate share of workers without biasing the results with manual assignment.

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332. The O*NET database contains hundreds of standardized and
occupation-specific descriptors. Seehttps://www.onetcenter.org.

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333. 81 FR 32459.

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334. 84 FR 51259.

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335. Of these workers, approximately 16.5 million pass only the standard test,
12.8 million pass both the standard and the HCE tests, and 446,600 pass only the
HCE test.

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336. See section VII.C.8 (Alternative 2). As discussed in section V.B, such
employees were always excluded from the EAP exemption prior to 2019, either by
the long test salary level itself, or under the 2004 rule salary level, which
was equivalent to the long test salary level. The remaining 2.2 million of these
affected employees earn between the long test salary level and the Department's
new standard salary level.

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337. This group includes workers who may currently be nonexempt under more
protective state EAP laws and regulations, such as some workers in Alaska,
California, Colorado, Maine, New York, Washington, and Wisconsin.

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338. Employment status of the civilian noninstitutional population, 1953 to
date. BLS Current Population Survey. https://www.bls.gov/ cps/ cpsaat01.htm.

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339. The Oxford Economics report also noted that there has been a 6-percent
rise in “the share of salaried workers in the economy . . . since 1998.”
However, any increase in the number of salaried workers does not have any
bearing on the validity of the probability codes, which the Department uses to
estimate whether a worker passes the duties test. Being paid on a salary basis
is one of the three tests for exemption, see § 541.602(a), and is distinct from
the duties test. Accordingly, the Department only applies the probability codes
to nonhourly workers—whom, as discussed above, the Department considers to be an
appropriate proxy for workers paid on a salary basis.

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340. Full-time is defined as 35 or more hours per week.

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341. The Department estimates the initial update to the standard salary level
will result in 959,000 affected workers earning between $684 and $844 per week.
The Department estimates the adjustment and managerial costs for this update
will be $202.3 million and transfers will be $204.3 million. For the initial
update to the HCE total annual compensation threshold, the Department estimates
that the update will result in 223,000 affected workers, $58.7 million in
adjustment and managerial costs, and $164.5 million in transfer payments.

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342. Regular overtime workers were identified in the CPS MORG with variable
PEHRUSL1. Occasional overtime workers were identified with variables PEHRUSL1
and PEHRACT1.

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343. CPS defines “usual hours” as hours worked 50 percent or more of the time.

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344. This group represents the number of workers with occasional overtime hours
in the week the CPS MORG survey was conducted. Because the survey week is a
representative week, the Department believes the prevalence of occasional
overtime in the survey week and the characteristics of these workers are
representative of other weeks (even though a different group of workers would be
identified as occasional overtime workers in a different week).

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345. A small proportion (0.5 percent) of all affected EAP workers earn implicit
hourly wages that are less than the applicable minimum wage (the higher of the
state or Federal minimum wage). The implicit hourly wage is calculated as total
weekly earnings divided by total weekly hours worked. For example, workers
earning the $684 per week standard salary level would earn less than the Federal
minimum wage if they work 95 or more hours in a week ($684 ÷ 95 hours = $7.20
per hour).

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346. Identified with CPS MORG variable GTMETSTA.

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347. Statistics of U.S. Businesses 2021, https://www.census.gov/
programs-surveys/ susb.html.

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348. 2017 Census of Governments. Table 1, https://www.census.gov/ data/ tables/
2017/ econ/ gus/ 2017-governments.html.

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349. OEWS 2022. Available at: https://www.bls.gov/ oes/ current/ oes131141.htm.

350. Previous related rulemakings used the CPS to estimate wage rates. The
Department is using OEWS data now to conform with standard practice for the
Department's economic analyses.

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351. The benefits-earnings ratio is derived from BLS's Employer Costs for
Employee Compensation (ECEC) data using variables CMU1020000000000D and
CMU1030000000000D. This fringe benefit rate includes some fixed costs such as
health insurance. As of when this final rule was drafted, 2023 ECEC data were
available only through the third quarter, so the Department continued to use the
2022 full-year data to calculate the benefits share.

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352. The Department believes that the overhead costs associated with this
rulemaking are small because existing systems maintained by employers to track
currently hourly employees can be used for newly overtime-eligible workers.
However, acknowledging that there might be additional overhead costs, the
Department has included an overhead rate of 17 percent.

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353. The 2022 fully-loaded hourly wage was adjusted to 2023 using the CPI-U.

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354. 81 FR 32474; 84 FR 51266.

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355. See84 FR 51267; 81 FR 32475.

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356. OEWS 2022. Available at: https://www.bls.gov/ oes/ current/ oes110000.htm.
This may be an overestimate of the wage rate for managers who monitor workers'
hours because (1) it includes very highly paid employees such as CEOs, and (2)
some lower-level supervisors are not counted as managers in the data.

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357. The benefits ratio is derived from BLS' 2022 Employer Costs for Employee
Compensation data using variables CMU1020000000000D and CMU1030000000000D. The
fully-loaded hourly wage rate was inflated to 2023 dollars using the BLS CPI-U.

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358. Fifty-two weeks may be an overestimate of the amount of time that an
employer would incur management costs in Year 1. For affected workers who earn
below $1,128, but at least $844, their employers may not incur additional
managerial costs until January 1, 2025 if they decide to wait to make changes in
response to the rule. Therefore, these managerial costs would not occur for the
full 52 weeks of the year. Because the Department does not know when employers
would make changes in response to the rule, this estimate of 52 weeks is used
for the entire population.

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359. See Fact Sheet #21: Recordkeeping Requirements under the Fair Labor
Standards Act, available at: https://www.dol.gov/ agencies/ whd/ fact-sheets/
21-flsa-recordkeeping.

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360. Golden, L. (2014). Flexibility and Overtime Among Hourly and Salaried
Workers. Economic Policy Institute. https://papers.ssrn.com/ sol3/ papers.cfm?
abstract_ id= 2597174.

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361. Lambert, S.J. (2007). Making a Difference for Hourly Employees. In A.
Booth, & A.C. Crouter, Work-Life Policies that Make a Real Difference for
Individuals, Families, and Communities. Washington, DC: Urban Institute Press.

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362. Balkin, D.B., & Griffeth, R.W. (1993). The Determinants of Employee
Benefits Satisfaction. Journal of Business and Psychology, 7(3), 323-339.

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363. 29 CFR 778.113-114.

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364. Church, J.D. and Akin, B. (2017). “Examining price transmission across
labor compensation costs, consumer prices, and finished-goods prices,” Monthly
Labor Review, U.S. Bureau of Labor Statistics; Emery, K. & Chang, C. (1996). Do
Wages Help Predict Inflation?, Federal Reserve Bank of Dallas, Economic Review
First Quarter 1996. https://www.dallasfed.org/ ~/ media/ documents/ research/
er/ 1996/ er9601a.pdf; Jonsson, M. & Palmqvist, S. (2004). Do Higher Wages Cause
Inflation? Sveriges Riksbank Working Paper Series 159.
http://archive.riksbank.se/ Upload/ WorkingPapers/ WP_ 159.pdf.

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365. Pevena, E.V. and Rudd, J.B. (2015). “The Passthrough of Labor Costs to
Price Inflation,” Finance and Economics Discussion Series 2015-042. Washington:
Board of Governors of the Federal Reserve System. https://dx.doi.org/ 10.17016/
FEDS.2015.042.

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366. The Federal minimum wage has not increased since 2009. Workers in states
with minimum wages higher than the Federal minimum wage could earn less than the
state minimum wage working fewer hours.

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367. Because these workers' hourly wages will be set at the minimum wage after
this rule, their employers will not be able to adjust their wages downward to
offset part of the cost of paying the overtime pay premium (which will be
discussed in the following section). Therefore, these workers will generally
receive larger transfers attributed to the overtime pay provision than other
workers.

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368. Wolfson, Paul J. and Belman, Dale, 15 Years of Research on U.S. Employment
and the Minimum Wage (December 10, 2016). Tuck School of Business Working Paper
No. 2705499. https://papers.ssrn.com/ sol3/ papers.cfm? abstract_ id= 2705499.
Dube, Arindrajit, Impacts of Minimum Wages: Review of the International Evidence
(November 2019). https://assets.publishing.service.gov.uk/ government/ uploads/
system/ uploads/ attachment_ data/ file/ 844350/ impacts_ of_ minimum_ wages_
review_ of_ the_ international_ evidence_ Arindrajit_ Dube_ web.pdf.

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369. Labor demand elasticity is the percentage change in labor hours demanded
in response to a one percent change in wages.

370. This elasticity estimate represents a short run demand elasticity for
general labor, and is based on the Department's analysis of Lichter, A., Peichl,
A. & Siegloch, A. (2014). The Own-Wage Elasticity of Labor Demand: A
Meta-Regression Analysis. IZA DP No. 7958.

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371. See Trejo, S.J. (1991). The Effects of Overtime Pay Regulation on Worker
Compensation. American Economic Review, 81(4), 719-740, and Barkume, A. (2010).
The Structure of Labor Costs with Overtime Work in U.S. Jobs. Industrial and
Labor Relations Review, 64(1), 128-142.

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372. Trejo, S. J. (1991). The Effects of Overtime Pay Regulation on Worker
Compensation. American Economic Review, 81(4), 719-740.

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373. Trejo, S. J. (2003). Does the Statutory Overtime Premium Discourage Long
Workweeks? Industrial and Labor Relations Review, 56(3), 375-392.

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374. Barkume, A. (2010). The Structure of Labor Costs with Overtime Work in
U.S. Jobs. Industrial and Labor Relations Review, 64(1), 128-142.

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375. Bell, D. N. F. and Hart, R. A. (2003). Wages, Hours, and Overtime Premia:
Evidence from the British Labor Market, Industrial and Labor Relations Review,
56(3), 470-480.

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376. Hart, R. A. and Yue, M. (2000). Why Do Firms Pay an Overtime Premium? IZA
Discussion Paper No. 163.

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377. Barzel, Y. (1973). The Determination of Daily Hours and Wages. The
Quarterly Journal of Economics, 87(2), 220-238, demonstrated that modest
fluctuations in labor demand could justify substantial overtime premiums in the
employment contract model. Hart, R. A. and Yue, M. (2000). Why Do Firms Pay an
Overtime Premium? IZA Discussion Paper No. 163, showed that establishing an
overtime premium in an employment contract can reduce inefficiencies.

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378. Barkume, A. (2010). The Structure of Labor Costs with Overtime Work in
U.S. Jobs. Industrial and Labor Relations Review, 64(1), 128-142.

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379. Bell, D. N. F. and Hart, R. A. (2003). Wages, Hours, and Overtime Premia:
Evidence from the British Labor Market, Industrial and Labor Relations Review,
56(3), 470-480.

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380. Illustrating the limitations of commenter-provided surveys for this
quantitative analysis, the responses to NAHB's survey have inconsistencies that
make them hard to interpret. For example, concerning the 2019 rule, NAHB
reported that 94 percent of respondents stated that the rule's increase in the
salary level to $35,568 did not affect anyone on their payroll. Nevertheless, of
the same respondents, 20% stated that they responded to the 2019 rule by
minimizing overtime hours and 18% stated that they raised salaries above the
threshold.

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381. In support, AFPI and Americans for Prosperity both cited to reports
regarding the NPRM for the 2016 rule. See James Sherk, Salaried Overtime
Requirements: Employers Will Offset Them with Lower Pay, Heritage Foundation
Backgrounder No. 3031, July 2, 2015. https://thf_ media.s3.amazonaws.com/ 2015/
pdf/ BG3031.pdf (cited by AFPI); Donald J. Boudreaux & Liya Palagashvili, An
Economic Analysis of Overtime Pay Regulations 17-21 (Apr. 2016), available at
https://www.mercatus.org/ hayekprogram/ research/ working-papers/
economic-analysis-overtime-pay-regulations (cited by Americans for Prosperity).

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382. Simon Quach, The Labor Market Effects of Expanding Overtime Coverage. This
is a working paper that was published in both 2022 and 2024. The 2024 version
can be found linked on Simon Quach's website: https://raw.githubusercontent.com/
SimonQuach1/ Papers/ main/ Quach_ OT.pdf? token= AH2DVMEDLJGBAWFAVXXUNMDAYGGDQ.
The Department believes that Oxford Economics was citing to the 2022 version of
the paper, which is Quach, S. (2022). The Labor Market Effects of Expanding
Overtime Coverage. https://papers.ssrn.com/ sol3/ papers.cfm? abstract_ id=
3608506.

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383. See section VII.C.3.iv (managerial costs).

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384. Both studies considered a population that included hourly workers.
Evidence is not available on how the adjustment towards the fixed-job model
differs between salaried and hourly workers. The fixed-job model may be more
likely to hold for salaried workers than for hourly workers since salaried
workers directly observe their weekly total earnings, not their implicit
equivalent hourly wage. Thus, applying the partial adjustment to the fixed-job
model as estimated by these studies may overestimate the transfers from
employers to salaried workers.

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385. Cherry, Monica, “Are Salaried Workers Compensated for Overtime Hours?”
Journal of Labor Research 25(3): 485-494, September 2004, found that exempt
full-time salaried employees earn more when they work more hours, but her
results do not lend themselves to the quantification of the effect on hours of
an increase in earnings.

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386. The Department uses the term “full overtime premium” to describe the
adjustment process as modeled. The full overtime premium model is a special case
of the general fixed-wage model in that the Department assumes the demand for
labor under these circumstances is completely inelastic. That is, employers make
no changes to employees' hours in response to these temporary, unanticipated
changes in demand.

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387. As explained in the previous section, to estimate the population of Type 2
workers, the Department supplemented workers who report working overtime in the
CPS reference week with some workers who do not work overtime in the reference
week to reflect the fact that different workers work occasional overtime in
different weeks.

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388. If a different week was chosen as the survey week, then some of these
workers would not have worked overtime. However, because the data are
representative of both the population and all twelve months in a year, the
Department believes the share of Type 2 workers identified in the CPS data in
the given week is representative of an average week in the year.

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389. Lichter, A., Peichl, A. & Siegloch, A. (2014). The Own-Wage Elasticity of
Labor Demand: A Meta-Regression Analysis. IZA DP No. 7958.

390. Some researchers have estimated larger impacts on the number of overtime
hours worked. For example, Hamermesh and Trejo (2000) conclude the price
elasticity of demand for overtime hours is at least −0.5. The Department decided
to use a general measure of elasticity applied to the average change in wages
since the increase in the overtime wage is somewhat offset by a decrease in the
non-overtime wage as indicated in the fixed-job model. Hamermesh, D. and S.
Trejo. (2000)). The Demand for Hours of Labor: Direct Evidence from California.
The Review of Economics and Statistics, 82(1), 38-47.

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391. Brown, Charles C., and Daniel S. Hamermesh. (2019). “Wages and Hours Laws:
What Do We Know? What Can Be Done?” RSF: The Russell Sage Foundation Journal of
the Social Sciences 5(5): 68-87. DOI: 10.7758/RSF.2019.5.5.04.

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392. For example, the authors defined the “non-exempt 1987-1989” group as
workers earning above $223 but below $455 during this period. Because the salary
level for the long test was $155 or $170 and was $250 for the short test, see
section VII.A.1 (Table 1), some of these workers would be exempt.

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393. In this equation, the only unknown is adjusted total hours worked. Since
adjusted total hours worked is in the denominator of the left side of the
equation and is also in the numerator of the right side of the equation, solving
for adjusted total hours worked requires solving a quadratic equation.

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394. It is possible that these workers may experience an increase in hours and
weekly earnings because of transfers of hours from other newly nonexempt workers
who do usually work overtime. Due to the high level of uncertainty in employers'
responses regarding the transfer of hours, the Department did not have credible
evidence to support an estimation of the number of hours transferred to other
workers.

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395. Type 2 workers will not see increases in regular earnings to the new
salary or compensation levels (as Type 4 workers do) even if their new earnings
in this week exceed those new levels. This is because the estimated new earnings
only reflect their earnings in those weeks when overtime is worked; their
earnings in typical weeks when they do not work overtime do not exceed the
salary or compensation level.

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396. Quach, S. (2024). The Labor Market Effects of Expanding Overtime Coverage.
https://raw.githubusercontent.com/ SimonQuach1/ Papers/ main/ Quach_ OT.pdf?
token= AH2DVMEDLJGBAWFAVXXUNMDAYGGDQ.

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397. The Department notes that the effective date of the 2019 final rule was in
January 2020, so using data from this month may not fully capture the effects of
the 2019 rule.

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398. Rohwedder, S. and Wenger, J.B. (2015). The Fair Labor Standards Act:
Worker Misclassification and the Hours and Earnings Effects of Expanded
Coverage. RAND Labor and Population.

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399. Department of Health and Human Services (2023). Federal Poverty Level.
https://www.healthcare.gov/ glossary/ Federal-poverty-level-fpl/ .

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400. See Rohwedder, S. and Wenger, J.B. (2015). The Fair Labor Standards Act:
Worker Misclassification and the Hours and Earnings Effects of Expanded
Coverage. RAND Labor and Population. RAND conducted a survey to identify the
number of workers who may have failed the standards duties test and yet are
classified as EAP exempt. The survey, a special module to the American Life
Panel, asked respondents: (1) their hours worked, (2) whether they are paid on
an hourly or salary basis, (3) their typical earnings, (4) whether they perform
certain job responsibilities that are treated as proxies for whether they would
justify exempt status, and (5) whether they receive any overtime pay. Using
these data, Rohwedder and Wenger found that “11.5 percent of salaried workers
were classified as exempt by their employer although they did not meet the
criteria for being so.” This survey was conducted when the salary level was
$455. The exact percentage may no longer be applicable, but the concern that in
some instances the duties test may be misapplied remains.

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401. Akerlof, G.A. (1982). Labor Contracts as Partial Gift Exchange. The
Quarterly Journal of Economics, 97(4), 543-569.

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402. Another model of efficiency wages, which is less applicable here, is the
adverse selection model in which higher wages raise the quality of the pool of
applicants.

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403. Kim, H.S., & Jang, S. (2019). Minimum Wage Increase and Firm Productivity:
Evidence from the Restaurant Industry. Tourism Management 71, 378-388.
https://doi.org/ 10.1016/ j.tourman.2018.10.029.

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404. Howes, Candace. (2005). Living Wages and Retention of Homecare Workers in
San Francisco. Industrial Relations, 44(1), 139-163. Dube, A., Lester, T.W., &
Reich, M.. (2014). Minimum Wage Shocks, Employment Flows and Labor Market
Frictions. IRLE Working Paper #149-13.

405. This literature tends to focus on changes in earnings for a specific
sector or subset of the labor force. The impact on turnover when earnings
increase across sectors (as would be the case with this regulation) may be
smaller.

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406. Argote, L., Insko, C. A., Yovetich, N., & Romero, A. A. (1995). Group
Learning Curves: The Effects of Turnover and Task Complexity on Group
Performance. Journal of Applied Social Psychology, 25(6), 512-529. Shaw, J. D.
(2011). Turnover Rates and Organizational Performance: Review, Critique, and
Research Agenda. Organizational Psychology Review, 1(3), 187-213.

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407. For more information, see OECD series, average annual hours actually
worked per worker, available at: https://stats.oecd.org/ index.aspx?
DataSetCode= ANHRS.

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408. Boushey, H. and Ansel, B. (2016). Overworked America, The economic causes
and consequences of long work hours. Washington Center for Equitable Growth.
https://equitablegrowth.org/ research-paper/ overworked-america/ ?longform=
true.

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409. Hamermesh, D.S., Kawaguchi, D., Lee, J. (2014). Does Labor Legislation
Benefit Workers? Well-Being after an Hours Reduction. IZA DP No. 8077.

Golden, L., & Gebreselassie, T. (2007). Overemployment Mismatches: The
Preference for Fewer Work Hours. Monthly Labor Review, 130(4), 18-37.

Hamermesh, D.S. (2014). Not Enough Time? American Economist, 59(2).

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410. The straight-time wage adjusts to a level that keeps weekly earnings
constant when overtime hours are paid at 1.5 times the straight-time wage. In
cases where adjusting the straight-time wage results in a wage less than the
minimum wage, the straight-time wage is set to the minimum wage.

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411. The South Census region is comprised of the following states: Alabama,
Arkansas, Delaware, District of Columbia, Florida, Georgia, Kentucky, Louisiana,
Maryland, Mississippi, North Carolina, Oklahoma, South Carolina, Tennessee,
Texas, Virginia, and West Virginia.

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412. The Midwest Census region is comprised of the following states: Kansas,
Illinois, Indiana, Iowa, Michigan, Minnesota, Missouri, Nebraska, North Dakota,
Ohio, South Dakota, and Wisconsin.

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413. The Northeast Census region is comprised of the following states:
Connecticut, Maine, Massachusetts, New Hampshire, New Jersey, New York,
Pennsylvania, Rhode Island, Vermont.

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414. The West Census region is comprised of the following states: Alaska,
Arizona, California, Colorado, Hawaii, Idaho, Montana, Nevada, New Mexico,
Oregon, Utah, Washington, Wyoming.

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415. The Department uses 2017 data here because although payroll data are
available for more recent years, the most recent revenue data are for 2017.

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416. Internal Revenue Service. (2023). SOI Tax Stats—Corporation Income Tax
Returns Complete Report (Publication 16). Available at: https://www.irs.gov/
statistics/
soi-tax-stats-corporation-income-tax-returns-complete-report-publication-16.

417. Table 1 of the IRS report provides total receipts, net income, and
deficits by industry. For each industry, the Department calculated the
profit-to-revenue ratio as net income (column (7)) less any deficit (column (8))
divided by total receipts (column (3)). Profits were then calculated as revenues
multiplied by profit-to-revenue ratios. Profits could not be used directly
because they are limited to only active corporations.

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418. In particular, a basic model of competitive product markets would predict
that highly competitive industries with lower rates of return would adjust to
increases in the marginal cost of labor arising from the rule through an
overall, industry-level increase in prices and a reduction in quantity demanded
based on the relative elasticities of supply and demand. Alternatively, more
concentrated markets with higher rates of return would be more likely to adjust
through some combination of price increases and profit reductions based on
elasticities as well as interfirm pricing responses.

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419. 84 FR 51260.

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420. See section V.B.4.ii.

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421. See84 FR 51250.

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422. See81 FR 32429.

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423. University of Michigan, Institute for Social Research. 2019 PSID. Data
available at: https://simba.isr.umich.edu/ data/ data.aspx.

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424. See81 FR 32441, 32507.

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425. To maximize the number of observations used in calculating the median wage
for each occupation-industry category, 3 years of data were pooled for each of
the endpoint years. Specifically, data from 2011, 2012, and 2013 (converted to
2012 dollars) were used to calculate the 2012 median wage and data from 2021,
2022, and 2023 (converted to 2022 dollars) were used to calculate the 2022
median wage.

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426. The geometric growth rate may be a flawed measure if either or both of the
endpoint years were atypical; however, in this instance these values seem
typical. An alternative method would be to use the time series of median wage
data to estimate the linear trend in the values and continue this to project
future median wages. This method may be preferred if either or both of the
endpoint years are outliers, since the trend will be less influenced by them.
However, the linear trend may be flawed if there are outliers in the interim
years. The Department chose to use the geometric mean because individual year
fluctuations are difficult to predict and applying the geometric growth rate to
each year provides a better estimate of the long-term growth in wages.

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427. To lessen small sample bias in the estimation of the median growth rate,
this rate was only calculated using CPS MORG data when these data contained at
least 10 observations in each time period.

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428. Bureau of Labor Statistics, Employment Projections Program. 2022-32
National Employment Matrix. https://www.bls.gov/ emp/ ind-occ-matrix/
matrix.xlsx.

429. An alternative method is to spread the total change in the level of
employment over the ten years evenly (constant change in the number employed).
The Department believes that on average employment is more likely to grow at a
constant percentage rate rather than by a constant level (a decreasing
percentage rate).

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430. Based on the Department's analysis of the following paper: Lichter, A.,
Peichl, A. & Siegloch, A. (2014). The Own-Wage Elasticity of Labor Demand: A
Meta-Regression Analysis. IZA DP No. 7958.

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431. Congressional Budget Office. 2023. The Budget and Economic Outlook: 2023
To 2033. See https://www.cbo.gov/ system/ files/ 2023-02/ 58848-Outlook.pdf.

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432. State minimum wages above the Federal level as of January 1, 2023 were
incorporated and used for projected years. Increases in minimum wages were not
projected. If state or Federal minimum wages increase over the next 10 years,
then estimated projected minimum wage transfers would be underestimated.

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433. 29 U.S.C. 213(a)(1).

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434. § 541.601.

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435. Stein Report at 19, 24; see also81 FR 32422.

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436. See84 FR 51237.

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437. See id. at 51238.

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438. See69 FR 22169 (Table 3).

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439. See84 FR 51267.

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440. Van Nostrand and Sinclair (2023). The U.S. Economy in Global Context.
U.S. Department of the Treasury. https://home.treasury.gov/ news/
featured-stories/ the-us-economy-in-global-context.

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441. University of Michigan (2024). Surveys of Consumers.
http://www.sca.isr.umich.edu/ .

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442. Bognar et al. (2023) What Does Everything Besides the Unemployment Rate
Tell Us About Labor Market Tightness?. Federal Reserve Bank of Chicago.
https://www.chicagofed.org/ publications/ chicago-fed-letter/ 2023/ 491.
Hornstein and Kudlyak (2022). The Pandemic's Impact on Unemployment and Labor
Force Participation Trends. Federal Reserve of Richmond Economic
https://www.richmondfed.org/ publications/ research/ economic_ brief/ 2022/ eb_
22-12.

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443. Although not excluding such entities and associated workers only affects a
small percentage of workers generally, it may have a larger effect (and result
in a larger overestimate) for nonprofits, because revenue from charitable
activities is not included when determining enterprise coverage. See section
VII.B.3.

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444. See Table 32.

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445. Golden, L. (2014). Flexibility and Overtime Among Hourly and Salaried
Workers. Economic Policy Institute. https://papers.ssrn.com/ sol3/ papers.cfm?
abstract_ id= 2597174.

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446. Lambert, S.J. (2007). Making a Difference for Hourly Employees. In A.
Booth, & A.C. Crouter, Work-Life Policies that Make a Real Difference for
Individuals, Families, and Communities. Washington, DC: Urban Institute Press.

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447. Balkin, D.B., & Griffeth, R.W. (1993). The Determinants of Employee
Benefits Satisfaction. Journal of Business and Psychology, 7(3), 323-339.

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448. Lambert, S.J., & Henly, J.R. (2009). Scheduling in Hourly Jobs: Promising
Practices for the Twenty-First Century Economy. The Mobility Agenda. Lambert,
S.J. (2007). Making a Difference for Hourly Employees. In A. Booth, & A.C.
Crouter, Work-Life Policies that Make a Real Difference for Individuals,
Families, and Communities. Washington, DC: Urban Institute Press.

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449. See88 FR 62217.

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450. See section VII.C.8.

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451. See sections V.B.4.iv, VII.C.2.

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452. See81 FR 32526; 69 FR 22238.

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453. See Stein Report at 5-6 (rejecting proposals to set varying regional
salary levels); see also69 FR 22238 (stating that implementing differing salary
levels based on business size industry-by-industry “would present the same
insurmountable challenges” as adopting regional or population-based salary
levels).

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454. See, e.g., Weiss Report at 14-15 (setting the long test salary level for
executive employees “slightly lower than might be indicated by the data” in part
to avoid excluding “large numbers of the executives of small establishments from
the exemption”).

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455. See81 FR 32526 (quoting 69 FR 22238).

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456. 69 FR 22238.

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457. See5 U.S.C. 603-604.

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458. See https://data.sba.gov/ dataset/ small-business-size-standards/
resource/ d89a5f17-ab8e-4698-9031-dfeb34d0a773.

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459. The SBA size standard changes in 2022 primarily adjusted the standards to
the 2022 NAICS, these changes were not substantive. https://www.govinfo.gov/
content/ pkg/ FR-2022-09-29/ pdf/ 2022-20513.pdf.

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460. Seehttps://advocacy.sba.gov/ resources/ the-regulatory-flexibility-act/
rfa-data-resources-for-federal-agencies/ for details.

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461. National Credit Union Association. (2018). 2018 Year End Statistics for
Federally Insured Credit Unions. Available at: https://www.cuna.org/ advocacy/
credit-union---economic-data/ data---statistics/
credit-union-profile-reports.html.

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462. Federal Depository Insurance Corporation. (2018). Quarterly Financial
Reports-Statistics On Depository Institutions (SDI). Available at:
https://www.fdic.gov/ foia/ ris/ id-sdi/ index.html. Data are from 12/31/17.

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463. United States Department of Agriculture. (2019). 2017 Census of
Agriculture: United States Summary and State Data: Volume 1, Geographic Area
Series, Part 51. Available at: https://www.nass.usda.gov/ Publications/
AgCensus/ 2017/ Full_ Report/ Volume_ 1,_ Chapter_ 1_ US/ usv1.pdf.

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464. Census of Governments. 2017. Available at: https://www.census.gov/ data/
tables/ 2017/ econ/ gus/ 2017-governments.html.

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465. The SUSB defines employment as of March 12th.

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466. The Department's estimates of the numbers of affected small entities and
affected workers who are employees of small entities includes entities not
covered by the FLSA and thus are likely overestimates. The Department had no
credible way to estimate which enterprises with annual revenues below $500,000
also did not engage in interstate commerce and hence are not subject to the
FLSA.

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467. The Department assumed that the small entity share of credit card issuing
and other depository credit intermediation institutions (which were not
separately represented in FDIC asset data), is similar to that of commercial
banking and savings institutions.

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468. Statistics of U.S. Businesses 2021, https://www.census.gov/
programs-surveys/ susb.html.

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469. Census of Governments 2017. Available at https://www.census.gov/
programs-surveys/ cog.html.

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470. SUSB reports data by “enterprise” size designations (a business
organization consisting of one or more domestic establishments that were
specified under common ownership or control). However, the number of enterprises
is not reported for the size designations. Instead, SUSB reports the number of
“establishments” (individual plants, regardless of ownership) and “firms” (a
collection of establishments with a single owner within a given state and
industry) associated with enterprises size categories. Therefore, numbers in
this analysis are for the number of establishments associated with small
enterprises, which may exceed the number of small enterprises. The Department
based the analysis on the number of establishments rather than firms for a more
conservative estimate (potential overestimate) of the number of small
businesses.

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471. Since information is not available on employer size in the CPS MORG,
respondents were randomly assigned as working in a small business based on the
SUSB probability of employment in a small business by detailed Census industry.
Annual payroll was estimated based on the CPS weekly earnings of workers by
industry size.

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472. The Department required at least 15 affected workers ( i.e., observations)
in small entities in Year 1.

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473. The Department used CPS microdata to estimate the number of affected
workers. This was done individually for each observation in the relevant sample
by randomly assigning them a small business status based on the best available
estimate of the probability of a worker to be employed in a small business in
their respective industry.

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474. A strand of literature indicates that small businesses tend to pay lower
wages than larger businesses. This may imply that workers in small businesses
are more likely to be affected than workers in large businesses; however, the
literature does not make clear what the appropriate alternative rate for small
businesses should be.

475. Workers are designated as employed in a small business based on their
industry of employment. The share of workers considered small in nonprofit, for
profit, and government entities is therefore the weighted average of the shares
for the industries that compose these categories.

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476. This is not the true lower bound estimate of the number of affected
entities. Strictly speaking, a true lower bound estimate of the number of
affected small entities would be calculated by assuming all employees in the
largest small entity are affected. For example, if the SBA standard is that
entities with 500 employees are “small,” and 1,350 affected workers are employed
by small entities in that industry, then the smallest number of entities that
could be affected in that industry (the true lower bound) would be three.
However, because such an outcome appears implausible, the Department determined
a more reasonable lower estimate would be based on average establishment size.

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477. As noted previously, these are not the true lower and upper bounds. The
values presented are the highest and lowest estimates the Department believes
are plausible.

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478. See section VII.C.3 for a more fulsome discussion on these costs.

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479. The incomplete fixed-job model reflects the Department's determination
that an appropriate estimate of the impact on the implicit hourly rate of pay
for regular overtime workers should be determined using the average of Barkume's
and Trejo's two estimates of the incomplete fixed-job model adjustments: a wage
change that is 40 percent of the adjustment toward the amount predicted by the
fixed-job model, assuming an initial zero overtime pay premium, and a wage
change that is 80 percent of the adjustment assuming an initial 28 percent
overtime pay premium.

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480. This is an average increase for all affected workers (both standard test
and HCE), and reconciles to the weighted average of individual salary changes
discussed in the Transfers section.

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481. The Department used this estimate of revenue, instead of small business
revenue reported directly from the 2017 SUSB so revenue aligned with payrolls in
2023.

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482. See29 CFR 516.3 (providing that employers need not maintain the records
required by 29 CFR 516.2(a)(6) through (10) for their EAP workers).

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483. See84 FR 51239; 81 FR 32411; 69 FR 22171.

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484. See84 FR 51238; 81 FR 32527; 69 FR 22237.

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485. See84 FR 51250 (internal citation omitted).

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486. See29 U.S.C. 203(s).

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487. 2 U.S.C. 1501 et seq.

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488. 29 U.S.C. 213(a)(1).

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489. 29 U.S.C. 203(e).

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490. 29 U.S.C. 203(x).

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491. 2 U.S.C. 1532(a)(4).

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492. 2020 state and local government payrolls were $1.1 trillion, inflated to
2023 payroll costs of $1.2 trillion using the GDP deflator. State and Local
Government Finances 2020. Available at https://www.census.gov/ data/ datasets/
2020/ econ/ local/ public-use-datasets.html.

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493. 2020 state and local revenues were $4.3 trillion, inflated to 2023 dollars
using the GDP deflator. State and Local Government Finances 2020. Available at
https://www.census.gov/ data/ datasets/ 2020/ econ/ local/
public-use-datasets.html.

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494. Private sector payroll costs are projected to be $8.1 trillion in 2023
based on private sector payroll costs of $6.6 trillion in 2017, inflated to 2023
dollars using the GDP deflator. 2017 Economic Census of the United States.

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495. Private sector revenues in 2017 were $37.0 trillion using the 2017
Economic Census of the United States. This was inflated to 2023 dollars using
the GDP deflator.

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496. See sections V.A.3, VII.C.

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497. See section IV.

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[FR Doc. 2024-08038 Filed 4-24-24; 8:45 am]

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